“Over the next decade, delivering applications to
people—wherever they work and play—will become a
defining issue for IT. Why? Because applications
are the language of business. Winners will be fl uent with
application delivery.
Others will lag behind, struggling with the
pace of change in an increasingly dynamic world.”
– Mark Templeton, President and CEO, Citrix Systems
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Citrix Systems, Inc. 851 West Cypress Creek Road Fort Lauderdale, FL 33309 USA www.citrix.com
2006 Annual Report
Earnings per Share
Operating Cash Flow
Corporate Information
Revenue
( millions)
$1,134
$909
$741
$0.97
$0.93
$0.75
( millions)
$329
$293
$265
‘04
‘05
‘06
‘04
‘05
‘06
‘04
‘05
‘06
Financial Highlights
(In thousands, except per share data)
2006
2005
2004
Year Ended December 31,
Net revenues
Cost of revenues:
Cost of license revenues
Cost of services revenues
Amortization of product related intangible assets
Total cost of revenues
$ 1,134,319
$ 908,722
$ 741,157
32,911
46,585
19,202
98,698
14,404
26,929
16,766
58,099
3,824
16,705
6,127
26,656
Gross margin
1,035,621
850,623
714,501
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other intangible assets
In-process research and development
155,331
480,343
178,669
16,934
1,000
108,751
394,153
125,425
11,622
7,000
86,654
337,777
105,799
6,204
19,100
Total operating expenses
832,277
646,951
555,534
Income from operations
203,344
203,672
158,967
Other income (expense), net
39,737
20,682
12,588
Write-off of deferred debt issuance costs
–
–
(7,219)
Income before income taxes
243,081
224,354
164,336
Income taxes
Net income
60,084
58,745
33,049
$ 182,997
$ 165,609
$ 131,287
Earnings per common share - diluted
$
0.97
$
0.93
$
0.75
Weighted average shares outstanding - diluted
187,725
177,771
174,374
Citrix Systems, Inc. is the global leader and the most trusted name in application delivery infrastructure. More than 200,000
organizations worldwide rely on Citrix to deliver any application to users anywhere with the best performance, highest security
and lowest cost.
Citrix customers include 100% of the Fortune 100 companies and 98% of the Fortune Global 500, as well as hundreds of
thousands of small businesses and prosumers. Citrix has approximately 6,200 channel and alliance partners in more than
100 countries. Annual revenue in 2006 was $1.1 billion.
Learn more at www.citrix.com.
Corporate Headquarters
Ft. Lauderdale, FL, USA
EMEA Headquarters
Schaffhausen, Switzerland
India Development Center
Bangalore, India
Stockholder Information
Corporate Offi cers
Mark B. Templeton
President and Chief Executive Offi cer
Online Division Headquarters
Santa Barbara, CA, USA
Pacifi c Headquarters
Hong Kong, China
Sydney Development Center
Sydney, Australia
Silicon Valley Headquarters
Santa Clara, CA, USA
Latin America Headquarters
Coral Gables, FL, USA
UK Development Center
Chalfont, United Kingdom
Investor Relations
Citrix’s stock trades on the NASDAQ Global Select Market
under the ticker symbol CTXS.
John C. Burris
Senior Vice President, Worldwide Sales and Services
The Citrix Annual Report and Form 10-K are available
electronically at www.citrix.com/annualreport.
David R. Friedman
General Counsel and Senior Vice President,
Human Resources and Secretary
David J. Henshall
Senior Vice President and Chief Financial Offi cer
Wes R. Wasson
Corporate Vice President, Worldwide Marketing
Board of Directors
Thomas F. Bogan
Partner, Greylock Partners
Murray J. Demo
Executive Vice President and Chief Financial Offi cer,
Postini, Inc.
Stephen M. Dow
General Partner, Sevin Rosen Funds
Asiff Hirji
Senior Director, TPG Capital, L.P.
Gary E. Morin
Former Executive Vice President and
Chief Financial Offi cer, Lexmark International, Inc.
Godfrey R. Sullivan
Former President, Hyperion Solution Corp., a wholly owned
subsidiary of Oracle Corp.
Mark B. Templeton
President and Chief Executive Offi cer,
Citrix Systems, Inc.
For further information about Citrix, additional copies
of this report, Form 10-K, or other fi nancial information
without charge, contact:
Citrix Systems, Inc.
Attn: Investor Relations
851 West Cypress Creek Road
Fort Lauderdale, FL 33309
United States
Tel: +1 954 267 3000
Tel: +1 800 424 8749
www.citrix.com/investors
Transfer Agent and Registrar
Computershare Trust Company, N.A.
P.O. Box 43023
Providence, RI 02940-3023
Tel: +1 877 282 1168
www.computershare.com
Independent Registered Public Accountants
Ernst & Young LLP
1 Clearlake Centre, Suite 900
250 South Australian Ave
West Palm Beach, FL 33401
Annual Meeting of Stockholders
The Annual Meeting of Stockholders of Citrix Systems, Inc.
will be held on October 18, 2007 at 2:00 p.m.
1801 NW 49th Street
Ft. Lauderdale, FL 33309
United States
Mark Templeton
President and CEO
Dear Fellow Stockholder:
In each of my letters over the past four years, I’ve discussed the strategic
transformation of Citrix with you. When I wrote the 2002 letter, we were
coming off our most diffi cult year since going public in 1995.
At that time, we set bold objectives to double our revenue to $1 billion
by 2006, and to lead the software market for delivering applications on demand.
To succeed, we needed new competencies in strategic planning, product
innovation, acquisition integration and business scalability. We’ve made
great progress on each of these dimensions.
I’m proud to report 2006 revenue of $1.134 billion. Credit goes to the Citrix
employees, business partners and families who are responsible for these
excellent results. Thank you for your trust and confi dence.
Exceeding $1 billion is a signifi cant milestone
achieved by less than two dozen software
companies in history. This achieve ment
underscores our ability to take a long-term
approach, to achieve meaningful objectives,
and to invest in technologies that make our
customers successful. It’s also a level that even
fewer have been able to sustain.
Financially, our goal is to deliver reliable
revenue growth with increasing operating
profit and cash flow. Over the past four
years, we’ve averaged over 21% growth in
revenue and over 22% in GAAP EPS growth.
Operating cash fl ow is up from $265 million in
2004 to $329 million in 2006. Th ese fi nancial
results give us the strength to invest for growth.
Th ere’s also strength in the growing diversity
of our revenue streams—product licensing,
license updates, technical services and online
services. In 2006, product licensing was up
19%—the largest increase we’ve experienced
this decade. License updates grew 23%, driven
largely by the success of our Subscription
Advantage program. Revenue from technical
services was up over 30% compared to 2005.
And, our Online Division’s “software-as-a-
service” business grew an impressive 50% to
almost $150 million.
In 2006, we on-boarded over 550 new
employees and completed two strategic
acquisitions— Refl ectent Soft ware and Orbital
Data. Th ese new teams bring us talent, experience
and deep expertise in fast-growing application
delivery market segments.
Citrix Systems, Inc.
2006 Annual Report
1
Acquisitions have accelerated our market
leadership, and have helped us further diversify
routes to customers. Th ey’ve also expanded our
mix of form factors for providing software—
as downloadable media, as a subscription
service and as an easy-to-install hardware
appliance.
We’ve taken a pragmatic approach to
inte grating these businesses into our ongoing
operations, focusing on people, on culture
and on building a bigger opportunity for
everyone. Smart selection and successful
acquisition integration are allowing us
to deliver excellent fi nancial results and
to dramatically improve our value—to
customers, employees and investors.
Globalization
Flex Working
Branch Expansion
Mobility
E-Commerce
Consolidation
Security
Compliance
Continuity
Web Services
Signifi cant business, technical and evolutionary forces are increasing the distance between
where people work and where applications are best hosted.
Vision, Technology and Market Alignment
We are being rewarded for our long-term
approach, for staying aggressive with our
strategy, and for making a diff erence with
customers. Today, Citrix has the core tech-
nologies that make it possible for anyone to
work from anywhere. Systematically, we’re
enabling customers to break the rigid con-
nections between where people work and
where applications are best managed.
In my 12 years with Citrix, I have not seen
a time when our vision, technology and
products are better aligned with customer
needs, making us more market-relevant
and strategic. All signs indicate that our
relevance is increasing faster than ever.
The pace of change for our customers—
along political, business and technological
dimensions—is far exceeding expectations
and preparation. Today’s dynamic world is
infl uenced by several mega-forces. Globaliza-
tion is shift ing the optimal location of business
processes and workforces in fundamental ways.
Geo-political and geo-physical events are dis-
rupting the workforce more frequently, costing
businesses, governments and individuals mil-
lions in lost productivity and revenue. Industries,
corporations and datacenters are consolidating
at a record pace, creating ever more complex
business situations to be serviced by IT organi-
zations. Every day, governments are holding
2
businesses more “information accountable”
through increased regulation, disclosure and
compliance inspection. And a younger work-
force—called “Echo Boomers”—is becoming a
major driver of new applications and workstyles.
Are these opportunities or threats?
We believe there are opportunities for those
who can seize the business advantages of
tapping into off shore talent, having granular
control over information security, easily
integrating acquisitions, quickly implementing
business reorganizations, smoothly handling
workforce disruptions and off ering fl exible
workstyles.
Businesses without these capabilities are
threatened and, I believe, will lag behind. Th ey
will struggle with the pace of change in
an increasingly dynamic world—where the
distance between people and applications
steadily grows. At Citrix, we’re convinced that
the winners will be fl uent with application
delivery because applications are the language
of business.
The last time I had a pizza delivered to
my home, I realized how incredibly strategic
“delivery” actually is. Imagine the value of
Amazon.com without FedEx providing reliable
delivery services. Imagine China’s Th ree Gorges
Hydroelectric Dam without the electrical grid
that delivers the power. Imagine DirecTV
without the satellites to deliver high-defi nition
programming to our homes. Now, imagine the
value of business applications without a system
for secure, reliable delivery—anywhere.
The fact is, most IT organizations have not
taken a holistic, architectural approach to
application delivery. Instead, they’ve taken an
incremental approach. Th is becomes painfully
clear when their businesses are faced with
change. Th ere’s widespread agreement that IT
systems for delivering applications are too
static, too complex, and cost too much to
maintain. Customers are stuck between the
realities of slow-growing technology budgets
and fast-changing business needs.
Citrix understands that a strategic, architec-
tural approach to application delivery is how
IT can become an enabler to business change
rather than a road block. Th is is why we
believe application delivery will become a
defi ning issue for IT over the next decade.
Th is is our opportunity. Th is is why we’re
investing in a diverse set of products—as
end-to-end infrastructure for application
delivery—and, this is our complete focus.
Multiple Growth Engines
Our product portfolio is allowing us to benefi t
from high-growth markets for virtualization,
application networking and “software as a
service” solutions.
Th is gives us three growth engines to leverage.
Our Application Virtualization products are
the industry’s “gold standard” and provide a
solid foundation for steady growth. Application
Networking, our newest product area, has
moved us quickly to the forefront of solutions
for branch offi ce workers and Web-based
applications. Our Application Sharing products
leverage the explosive use of the Internet,
driving the growth of our Online Division’s
“soft ware-as-a-service” business.
Citrix Systems, Inc.
2006 Annual Report
3
Application Virtualization
Presentation Server I Desktop Server I EdgeSight
Application Networking
NetScaler I Access Gateway I WANScaler
Online Services
GoToMyPC I GoToAssist I GoToMeeting I GoToWebinar
Citrix offers products in three high-growth markets for Application Delivery Infrastructure.
Application Virtualization
Th e ability to deliver Microsoft Windows-
based applications—securely, cost-eff ectively
and with high performance—continues to be
a signifi cant driving force for our business.
Citrix Presentation Server, our fl agship product
line, is the most widely used virtualization
technology in the world, serving over
100,000 organizations across the globe with
this highly valued business capability. Today,
we’re investing heavily in Presentation Server
technologies—especially to leverage the enor-
mous power of 64-bit technology—further
reducing operating cost and improving its
per for mance. In addition, we’re undertaking
the significant transition to Microsoft’s new
Longhorn Server platform, providing a
migration path for customers and adding
new virtualization capabilities for Windows
applications.
We’re also investing to expand our opportunity
in virtualization markets. For example, our
Dynamic Desktop Initiative (DDI) allows
Windows “desktops” to be delivered—centrally
from the datacenter—as a service. In concept,
this initiative will do for “Windows desktops”
what Presentation Server has done for
“Windows applications.” Th e market for desktop
delivery technology is expected to grow
dramatically over the next three years.
Analysts have estimated that 400 million PC
desktops will be upgraded to Microsoft ’s new
Windows Vista desktop. Faced with large-
scale migrations, many organizations are
re-evaluating their “desktop refresh” meth-
ods, looking for more cost-eff ective, more
secure and better ways.
To address this opportunity, we’re introducing
a new product line designed to revolutionize
desktop refresh, replacing it with “desktop
delivery.” Our Desktop Server product line
will deliver Windows desktops from the
datacenter as a secure on-demand service.
Desktop Server builds upon virtualization
technologies, industry partnerships and
go-to-market engines already in place. Going
forward, we’ll also incorporate streaming
technologies from our recent acquisition
of Ardence.
Traditional ways to deliver a Windows-based
application or desktop are labor intensive
and costly. We believe the effi ciency, fl exibility
and speed of virtualizing and streaming to
the widest array of endpoint devices will grow
more compelling and valuable—especially in a
dynamic world.
4
Application Networking
As applications accelerate their move to
the Web and as end users become more
geographically dispersed, customers need
even more control over the security, perfor-
mance and cost of application delivery. Th is
has driven our investments to aggressively
enter the adjacent, fast-growing Application
Networking market. With our highly respected
Citrix NetScaler off ering, our market-leading
Citrix Access Gateway SSL VPN line of
products, and our recently introduced Citrix
WANScaler products, we are positioned to
continue gaining market share in this space.
Our NetScaler Web application delivery appli-
ances are powering the most business-critical
applications on the Web today, helping Google,
Yahoo, eBay, Amazon, MySpace and many
others maintain the security, performance
and cost-effi ciency they need. In fact, we
estimate that over 75% of Internet users pass
through a Citrix NetScaler system every
day. Our Access Gateway product line secures
the point of access to applications of any
type—Web or Windows. In just two years,
Access Gateway has rapidly grown to an
industry-leading position in SSL VPN market
share. Th e recent introduction of Citrix
WANScaler moves us into the rapidly grow-
ing market of WAN optimization. WANScaler
products will benefi t our customers with
branch offices and remote workforces by
accelerating application performance—
exponentially—across wide-area networks.
Application Networking product and services
revenue tripled in 2006, to over $109 million,
driven by early successes in Web application
delivery, SSL VPN, and WAN optimization
segments. Th e application networking market
holds tremendous potential, and Citrix is at
the forefront.
Online Services
In 2004, we formed our Online Services
Division through a strategic acquisition,
broadening our portfolio into Web-based
application sharing and collaboration. It also
brought the talent and technology we need to
reach additional customer segments in a new
way—through soft ware-as-a-service (SaaS).
At the time, the soft ware landscape was
changing and we believed that eventually,
every enterprise soft ware company would
need a competency in SaaS. Our online
services business has allowed us to build pow-
erful SaaS technical infra structure, to leverage
the business model of a subscription-type
service, and to get smarter about Web-based
customer acquisition.
In 2004, we started with two products and
a run-rate of roughly $44 million. Since then,
we’ve grown to four SaaS products and almost
$150 million in revenue.
Our most successful offering to-date,
GoToMeeting, is one of the fastest-growing
online collaboration solutions in the market
today. It provides a fast, easy, secure and
cost-eff ective way to train, demonstrate, and
collaborate online. It leverages the same appli-
cation- sharing technologies and customer
acquisition model that’s made GoToAssist a
leading product in its market and
GoToMyPC products #1 in their markets.
In 2006, we launched a fourth product,
GoToWebinar that makes it easy for anyone
to demonstrate, train and present information
to large audiences over the Web. Historically,
online events have been complex processes, oft en
involving 50 to 100 time-consuming steps.
GoToWebinar reduces it to three self-service
steps, making it simple to deliver a successful
webinar.
GoToWebinar is off to a very fast start and
shows how the core innovation in our SaaS
infrastructure is providing Citrix with a
platform for growth.
Citrix Systems, Inc.
2006 Annual Report
5
Today, these online services are making
application sharing and collaboration easy
and cost-eff ective for prosumers and smaller
customers to adopt. Looking forward, we
believe larger customers will begin to see the
value of SaaS products as well, making them
increasingly strategic components of our
end-to-end application delivery infrastructure.
Strong Product Pipeline
Th ese growth engines—application virtualiza-
tion, application networking and online
services—give us tremendous confi dence
in our future. At the same time, we’re antici-
pating customer needs, building an exciting
pipeline of new technologies and products.
Citrix customers will thrive in a more
dynamic world with Citrix innovations.
Th is is our fuel for sustainable growth.
We’re integrating our new Citrix EdgeSight
application performance-monitoring tech-
nology into multiple product families, such
as Presentation Server and NetScaler, which
are becoming the fi rst application delivery
systems with this important capability built in.
We’re expanding our partnership with
Microsoft through the joint development
of a new “branch offi ce in-a-box” appliance,
further extending our WAN optimization
capabilities and increasing our addressable
market opportunity.
We’re building a workforce continuity
SaaS product—a project we code-named
“Kent”—that gives businesses on-demand
communication, collaboration and applica-
tion delivery capabilities needed to handle
unforeseen events that prevent workers
from getting to the offi ce.
We have a great array of new tech nologies
for streaming operating systems, virtual
machine images, embedded systems and lots
more that will allow us to continue to innovate
on top of Microsoft ’s next-generation
Windows Server—Longhorn Server.
“ Our plan is simple—to provide IT with the power of a secure, end-to-end
infrastructure for delivering applications and desktops—anywhere.”
Growth and Sustainability
Our pace of investment and our vision for
Application Delivery has put us in an amazing
position. We’re off ering quality solutions for the
fl exibility, security, and effi ciencies that busi-
nesses need from IT—now and in the future.
A bank with Citrix products can open, close
or merge branches in weeks—instead of
months. Healthcare providers can deliver
patient information directly to the point-of-
care—saving lives, saving time and saving
money. Teleworking employees can easily use
a home PC to securely access their offi ce PC
over any Internet connection. Schools with
Citrix desktop streaming technology can aff ord
more computing in classrooms, labs and the
front offi ce. Small businesses with our online
application-sharing products can leverage
the Internet to reach customers across global
markets. Our online assistance products allow
technology companies to provide top-notch
customer support over the Web and our new
6
Top 10 Strategic IT Vendors
1. Cisco
2. Microsoft
3.
IBM
4. HP
5. Dell
6. Symantec
7. McAfee
8. Citrix Systems
888.
9.
9.
9.
10. Verizon
10. Verizon
8. Citrix Systems
Survey of IT executives asked to name
the infrastructure vendors they consider
most strategic to their business
(Network World, 11/22/06).
desktop delivery infrastructure lets manufac-
turers tap into engineering talent in Hungary,
China and India—without compromising
intellectual property.
Surveys of CIOs of mid- and large-size enter-
prises tell us their most strategic challenges are
not technology issues—they’re business issues.
“Enabling business change and market respon-
siveness” tops the list. Th is is not surprising.
We are convinced that a strategic approach to
delivering applications is the solution. Appli-
cations live at the intersection of information
technology and how business gets done.
More frequently than ever, Citrix is acknowl-
edged in the top ranks of strategic infrastructure
vendors. Our goal, over time, is to rank
consistently in the top fi ve. Our plan is sim-
ple—to provide IT with the power of a secure,
end-to-end infrastructure for delivering
applications, information and content—any-
where. As applications evolve, as user needs
vary, as business venues shift and as new
business opportunities appear, CIOs with
Citrix products can say “bring it on!”
Citrix has a solid record demonstrating the
ability to see invention through to adoption.
We do not assume that a technical advantage
is our core value and competitive advantage.
We believe that technical advantages can
only be assumed to be short-term, and
through solid execution, used to gain
market positions which are long-term.
Our market and growth are not being ignored
by competition. We face larger competitors
around the edges of our core markets, and
smaller competitors that are completely focused
on only one of our market segments. We’ll
compete fiercely. End-to-end application
delivery is our complete focus—not a sideline.
We’ll diff erentiate, by being a thought leader,
by off ering a single source for application
delivery infrastructure, by developing a deliv-
ery system that gets more intelligent as it
becomes more complex and by continuously
improving on the user’s access experience.
I’m bullish about the business relevance of
application delivery infrastructure—especially
considering the velocity of change that will
be emblematic of the next fi ve years. We have
a compelling vision, a unique strategy,
excellent execution, a winning mindset, a
determined culture and the passion to make
our customers successful.
Th e board, the management team and I thank
you for your continuing support.
Mark Templeton
President and Chief Executive Offi cer
Citrix Systems, Inc.
2006 Annual Report
7
Note Regarding Forward-Looking Statements
This Annual Report contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements in the Annual Report, such as statements con-
cerning 2006, the access infrastructure market, and management’s strategic plans, do not constitute guarantees of future performance. Those statements involve a
number of factors that could cause actual results to differ materially, including risks associated with the Company’s business, involving the Company’s revenue
growth and recognition of revenue, products, their development and distribution, product demand and pipeline, economic and competitive factors, the Company’s
key strategic relationships, acquisitions, and related integration risks as well as other risks detailed in the Company’s fi lings with Securities and Exchange
Commission. Citrix assumes no obligation to update any forward-looking information contained in the Annual Report with respect to the statements made within.
Investors are cautioned that statements in this Annual Report that are not strictly historical statements, including, without limitation, statements regarding the
Company’s access to the infrastructure market, management’s strategic plans, revenue growth, revenue recognition, profi ts, cash fl ows, composition of revenues,
cost of revenues, operating expenses, sales, marketing and support expenses, general and administrative expenses, research and development expenses, prod-
ucts and their development and distribution, product demand and pipeline, Subscription Advantage, Presentation Server, NetScaler, Access Suite and Access
Gateway, historical stock option granting practices, cash and non-cash charges, contingent liabilities under Internal Revenue Code Section 409A, product and price
competition, Citrix Online division, economic, market and competitive factors, key strategic relationships, acquisitions and related integration risks, customer diversi-
fi cation, product price and inventory, contingent consideration payments, deferred revenues, international operations and expansion, valuations of investments and
derivative instruments, technology relationships, reinvestment or repatriation of foreign earnings, gross margins, amortization expense and intangible assets, impair-
ment charges, anticipated operating and capital expenditure requirements, cash infl ows, contractual obligations, in-process research and development, advertising
campaigns, tax rates and deductions, SFAS 123R, leasing and subleasing activities, stock repurchases, investment transactions, liquidity, litigation matters, distribu-
tion channels, stock price, payment of dividends and potential debt or equity fi nancings constitute forward-looking statements and do not constitute guarantees of
future performance.
Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by the
forward-looking statements, including, without limitation, variability and seasonality in the Company’s revenue and operating results, increased competition, changes
in the Company’s pricing policies or those of its competitors, the success of the Company’s product lines, the Company’s product concentration and its ability to
develop and commercialize new products and services, the continuation of key third party licenses and strategic relationships, the uncertainty in the IT spending
environment, the Company’s ability to successfully integrate the operations, technology, products and employees of acquired companies, and the possible failure
to achieve or maintain anticipated revenues and profi ts from acquisitions, charges in the event of the impairment of assets acquired through business combinations
and licenses, the size, timing and recognition of revenue from signifi cant orders, the Company’s ability to expand and diversify distribution channels, foreign opera-
tions and vertical and geographic markets, protection of the Company’s intellectual property rights, the Company’s ability to maintain and expand its core business
in large enterprise accounts, the Company’s ability to attract and retain small sized customers, the Company’s reliance on and the success of the Company’s
independent distributors and resellers for the marketing and distribution of the Company’s products and the success of the Company’s marketing and licensing
programs, the restrictions associated with the Company’s Credit Facility and Term Loan the management of anticipated future growth and the recruitment and
retention of qualifi ed employees, the management of operations and operating expenses, the security of customer data, the success of investments in the
Company’s product groups, the ability of the Company to fund price adjustments and product returns on inventories, the effect of increased government regulation,
the effect of new accounting pronouncements on revenue and expense recognition, including the effects of SFAS 123(R) on certain of the Company’s GAAP fi nan-
cial measures due to the variability of the factors used to estimate the value of stock-based compensation, the volatility of the Company’s stock price, downturns in
economic conditions generally, political and social turmoil and natural disasters, as well as other risks detailed in the Company’s fi lings with Securities and Exchange
Commission, including the Company’s Annual Report on Form 10-K for the fi scal year ended December 31, 2006.
The Company assumes no obligation to update any forward-looking information contained in this Annual Report with respect to the statements made within.
© 2007 Citrix Systems, Inc. All rights reserved. Citrix®, Citrix Access Suite™, Citrix Presentation Server™, Citrix Access Gateway™, Citrix Password Manager™,
Citrix Access Essentials™, GoToMeeting®, GoToAssist®, GoToMyPC®, NetScaler® , the Access button and Citrix SmoothRoaming™ are trademarks of Citrix
Systems, Inc. and/or one or more of its subsidiaries, and may be registered in the United States Patent and Trademark Offi ce and in other countries. All other
trademarks and registered trademarks are the property of their respective owners.
8
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Index to Financials
10 Selected Consolidated Financial Data
15 Management’s Discussion and Analysis of Financial Condition
and Results of Operations
50 Quantitative and Qualitative Disclosures About Market Risk
53 Controls and Procedures
54 Report of Independent Registered Public Accounting Firm
55 Report of Independent Registered Public Accounting Firm
56 Consolidated Balance Sheets
57 Consolidated Statements of Income
58 Consolidated Statements of Stockholders’ Equity
and Comprehensive Income
60 Consolidated Statements of Cash Flows
62 Notes to Consolidated Financial Statements
104 Quarterly Financial Information (Unaudited)
116 Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
IBC Corporate Information and Stockholder Information
Citrix Systems, Inc.
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Selected Consolidated Financial Data
The following selected consolidated financial data should
Annual Report and Note 2 to our consolidated financial
be read in conjunction with the consolidated financial
statements included in this Annual Report. The financial
statements and notes thereto and “Management’s
statements and related financial information contained in
Discussion and Analysis of Financial Condition and Results
such previously filed reports should not be relied upon.
of Operations” appearing elsewhere in this Annual Report.
The financial information that has been previously filed or
We have not amended our previously filed Annual Reports
otherwise reported for the restated periods is superseded
on Form 10-K and Form 10-K/A or our previously filed
by the information contained in this Annual Report and
Quarterly Reports on Form 10-Q for the periods affected
on our Annual Report on Form 10-K for the year ended
by the restatement, which are described in “Management’s
December 31, 2006.
Discussion and Analysis of Financial Condition and
Results of Operations” appearing elsewhere in this
The following table sets forth the effect of the restatement for each of the applicable fiscal years:
(In thousands, except per share data)
2006
2005(a)
2004(a)
2003
2002
(Restated)
(Restated)
(Restated)
(Restated)
Year Ended December 31,
Consolidated Statements of Income Data (a):
Net revenues
Cost of revenues(b)
Gross margin
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other intangible assets
In-process research and development
Total operating expenses
Income from operations
Interest income
Interest expense
Other income (expense), net
Income before income taxes
Income taxes
Net income
Diluted earnings per share(c)
$ 1,134,319
98,698
$ 908,722
58,099
$ 741,157
26,656
$ 588,625
31,639
$ 527,448
30,710
1,035,621
850,623
714,501
556,986
496,738
155,331
480,343
178,669
16,934
1,000
832,277
203,344
41,210
(927)
(546)
243,081
60,084
108,751
394,153
125,425
11,622
7,000
646,951
203,672
23,614
(2,426)
(506)
224,354
58,745
86,654
337,777
105,799
6,204
19,100
555,534
158,967
14,274
(11,756)
2,851
164,336
33,049
66,366
258,522
87,196
300
—
412,384
144,602
21,120
(18,436)
3,458
150,744
30,702
73,464
245,914
92,351
485
—
412,214
84,524
30,943
(18,268)
(3,483)
93,716
13,401
$
$
182,997
$ 165,609
$ 131,287
$ 120,042
$ 80,315
0.97
$
0.93
$
0.75
$
0.70
$
0.45
10
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(In thousands)
2006
2005
2004
2003
2002
(Restated)
(Restated)
(Restated)
(Restated)
Year Ended December 31,
Consolidated Balance Sheet Data (a):
Total assets
Current portion of long-term debt
Stockholders’ equity
Long term debt
$ 2,024,473 $ 1,698,982 $ 1,306,416 $ 1,369,768 $ 1,186,993
—
622,573
—
—
1,214,528
31,000
—
1,464,289
—
—
936,833
—
351,423
717,191
—
(a) For more information regarding the investigation of our historical stock option granting practices and the associated restatements, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 to our consolidated financial
statements included elsewhere in this Annual Report.
(b) Cost of revenues includes amortization of product related intangible assets of $19.2 million, $16.8 million, $6.1 million, $11.0 million and
$10.8 million in 2006, 2005, 2004, 2003 and 2002, respectively.
(c) Our diluted weighted–average shares outstanding primarily fluctuates based on the level of stock repurchases made under our stock
repurchase program and shares issued in connection with our acquisitions. See Notes 4 and 8 to our consolidated financial statements
included in this Annual Report.
The following adjusts our consolidated income statements
Discussion and Analysis of Financial Condition and Results
for the years ended December 31, 2005, 2004, 2003 and
of Operations” and in Note 2 to our consolidated financial
2002 for the restatements as described in “Management’s
statements included elsewhere in this Annual Report.
(In thousands, except per share data)
(As reported) (Adjustments) (As restated) (As reported) (Adjustments) (As restated)
Consolidated Statements of Income Data:
Year Ended December 31,
2005
2004
$ 908,722
$ 741,157
$ —
$ 741,157
Net revenues
Cost of revenues(a)
Gross margin
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other intangible assets
In-process research and development
Total operating expenses
Income from operations
Interest income
Interest expense
Write-off of deferred debt issuance costs
Other income (expense), net
Income before income taxes
Income taxes
Net income
Diluted earnings per share(b)
$ 908,722
$
57,964
850,758
108,687
393,420
125,538
11,622
7,000
646,267
204,491
23,614
(2,229)
—
(368)
—
135
(135)
64
733
(113)
—
—
684
(819)
—
(197)
—
(138)
58,099
26,423
850,623
714,734
108,751
394,153
125,425
11,622
7,000
646,951
203,672
23,614
(2,426)
—
(506)
86,357
337,566
106,516
6,204
19,100
555,743
158,991
14,274
(4,367)
(7,219)
2,754
225,508
(1,154)
224,354
164,433
59,168
$ 166,340
$
0.93
$
$
(423)
(731)
—
(265)
58,745
32,887
$ 165,609
$ 131,546
$
0.93
$
0.75
177,771
174,734
233
(233)
297
211
(717)
—
—
(209)
(24)
—
(170)
—
97
(97)
162
$ (259)
$ —
(360)
26,656
714,501
86,654
337,777
105,799
6,204
19,100
555,534
158,967
14,274
(4,537)
(7,219)
2,851
164,336
33,049
$ 131,287
$
0.75
174,374
Diluted weighted-average shares outstanding(b)
178,036
Citrix Systems, Inc.
2006 Annual Report
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Selected Consolidated Financial Data
(In thousands, except per share data)
(As reported)
(Adjustments) (As restated) (As reported) (Adjustments) (As restated)
Year Ended December 31,
2003
2002
Consolidated Statements of
Income Data:
Net revenues
Cost of revenues(a)
Gross margin
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other
intangible assets
Total operating expenses
Income from operations
Interest income
Interest expense
Other income (expense), net
Income before income taxes
Income taxes
Net income
$ 588,625
31,072
557,553
$
—
567
(567)
$ 588,625
31,639
$ 527,448
29,841
$
— $ 527,448
30,710
869
556,986
497,607
(869)
496,738
64,443
252,749
85,672
300
403,164
154,389
21,120
(18,280)
3,458
160,687
33,744
1,923
5,773
1,524
—
9,220
(9,787)
—
(156)
—
(9,943)
(3,042)
66,366
258,522
87,196
300
412,384
144,602
21,120
(18,436)
3,458
150,744
30,702
$ 126,943
$ (6,901)
$ 120,042
68,923
235,393
88,946
485
393,747
103,860
30,943
(18,163)
(3,483)
113,157
19,237
93,920
4,541
10,521
3,405
73,464
245,914
92,351
—
485
18,467
412,214
(19,336)
—
(105)
—
(19,441)
(5,836)
84,524
30,943
(18,268)
(3,483)
93,716
13,401
$ (13,605)
$ 80,315
0.52
$
(0.07)
$
0.45
$
$
Diluted earnings per share(b)
$
0.74
$
(0.04)
$
0.70
Diluted weighted-average shares
outstanding(b)
171,447
(256)
171,191
179,359
(15)
179,344
(a) Cost of revenues includes amortization of product related intangible assets of $16.8 million, $6.1 million, $11.0 million and $10.8 million
in 2005, 2004, 2003 and 2002, respectively.
(b) Our diluted weighted–average shares outstanding primarily fluctuates based on the level of stock repurchases made under our stock
repurchase program and shares issued in connection with our acquisitions. See Notes 4 and 8 to our consolidated financial statements
included in this Annual Report.
The following adjusts our consolidated balance sheets
and Analysis of Financial Condition and Results of
as of December 31, 2005, 2004, 2003 and 2002 for the
Operations” and in Note 2 to our consolidated financial
restatements as described in “Management’s Discussion
statements included elsewhere in this Annual Report.
12
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December 31, 2005
December 31, 2004
(As Reported) (Adjustments) (As restated) (As reported) (Adjustments) (As restated)
Assets:
Current assets:
Cash and cash equivalents
$
484,035
$
— $
484,035
$
73,485
$
— $
73,485
Short-term investments
Inventory
Accounts receivable net of
allowances
Prepaid expenses and other
current assets
Current portion of deferred tax
assets, net
Total current assets
Restricted cash equivalents and
investments
Long-term investments
Property and equipment, net
Goodwill, net
Other intangible assets, net
Long-term portion of deferred
tax assets, net
Other assets
Total Assets
Liabilities:
Current liabilities:
Accounts payable
Accrued expenses
Income taxes payable
Current portion of deferred
revenues
Total current liabilities
Long term portion of deferred
revenues
Long-term debt
Other liabilities
Commitments and contingencies
Stockholders’ equity
Preferred stock at $.01 par value:
5,000 shares authorized
Common stock at $0.001 par
value 1,000,000 shares
authorized
Additional paid-in capital
Deferred compensation
Retained earnings
Accumulated other
comprehensive (loss) Income
Less- common stock in treasury
Total stockholders’ equity
Total liabilities and
stockholders’ equity
18,900
3,933
142,015
31,164
46,410
726,457
63,728
51,286
73,727
591,994
137,333
29,158
7,973
—
—
—
—
952
952
—
—
—
—
—
16,374
—
18,900
3,933
159,656
783
142,015
108,399
31,164
40,376
47,362
727,409
63,728
51,286
73,727
591,994
137,333
45,532
7,973
43,881
426,580
149,051
183,974
69,281
361,452
87,172
—
8,574
—
—
—
—
1,884
1,884
—
—
—
—
—
18,448
—
159,656
783
108,399
40,376
45,765
428,464
149,051
183,974
69,281
361,452
87,172
18,448
8,574
$ 1,681,656
$
17,326
$ 1,698,982
$ 1,286,084
$ 20,332
$ 1,306,416
$
33,495
$
— $
33,495
$
17,554
$
— $
17,554
125,029
1,329
266,223
426,076
19,803
31,000
1,297
—
226
6,278
—
—
6,278
—
—
—
—
—
131,307
1,329
266,223
432,354
19,803
31,000
1,297
—
226
1,189,460
134,509
1,323,969
(18,873)
944,626
(2,544)
(120,917)
(21,417)
823,709
111,535
2,198
210,872
342,159
14,271
—
4,749
—
213
872,659
(1,063)
778,286
8,404
—
—
8,404
—
—
—
—
—
119,939
2,198
210,872
350,563
14,271
—
4,749
—
213
138,247
1,010,906
(6,133)
(7,196)
(120,186)
658,100
(4,463)
2,110,976
(907,496)
1,203,480
—
(4,463)
7,489
—
7,489
11,048
2,122,024
1,657,584
11,928
1,669,512
—
(907,496)
11,048
1,214,528
(732,679)
924,905
—
11,928
(732,679)
936,833
$ 1,681,656
$
17,326
$ 1,698,982
$ 1,286,084
$ 20,332
$ 1,306,416
Citrix Systems, Inc.
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Selected Consolidated Financial Data
December 31, 2003
December 31, 2002
(As reported) (Adjustments)
(As restated)
(As reported) (Adjustments) (As restated)
Assets:
Current assets:
Cash and cash equivalents
$
182,969
$
— $
182,969
$
$
— $
14,992
$
$
14,992
93,966
5,498
Current portion of deferred revenues
152,938
Convertible subordinated debentures-
Short-term investments
Accounts receivable net of allowances
Prepaid expenses and other
current assets
Current portion of deferred
tax assets, net
Total current assets
Restricted cash equivalents and
investments
Long-term investments
Property and equipment, net
Goodwill, net
Other intangible assets, net
Long-term portion of deferred
tax assets, net
Other assets
Total Assets
Liabilities:
Current liabilities:
Accounts payable
Accrued expenses
Income taxes payable
current
Total current liabilities
Long term portion of deferred revenues
Convertible subordinated debentures
long-term
Other liabilities
Commitments and contingencies
Put warrants
Common stock subject to repurchase
Stockholders’ equity
Preferred stock at $.01 par value:
5,000 shares authorized
Common stock at $0.001 par value
1,000,000 shares authorized
Additional paid-in capital
Deferred compensation
Retained earnings
Accumulated other comprehensive
(loss) income
Less- common stock in treasury
Total stockholders’ equity
Total liabilities and
stockholders’ equity
14
385,431
87,464
58,167
51,540
765,571
146,460
183,411
65,837
152,364
21,300
3,168
6,828
—
—
—
3,848
3,848
—
—
—
—
—
20,981
—
385,431
87,464
82,350
95,780
69,471
58,167
36,400
55,388
769,419
146,460
183,411
65,837
152,364
21,300
24,149
6,828
49,515
333,516
172,106
369,168
76,534
152,364
30,849
5,587
21,407
$
— $
—
—
—
4,852
4,852
—
—
—
—
—
20,610
—
82,350
95,780
69,471
36,400
54,367
338,368
172,106
369,168
76,534
152,364
30,849
26,197
21,407
$ 1,344,939
$
24,829
$ 1,369,768
$ 1,161,531
$
25,462
$ 1,186,993
14,436
—
—
—
14,436
—
—
—
—
—
—
—
143,967
(13,647)
108,402
5,498
152,938
351,423
633,253
12,137
—
7,187
—
—
—
203
844,078
(13,647)
526,813
11,913
73,768
793
95,963
—
182,437
8,028
333,549
6,452
7,340
9,135
—
197
$
— $
17,479
—
—
—
17,479
—
—
—
—
—
—
—
595,959
—
139,821
(18,812)
519,797
(113,026)
11,913
91,247
793
95,963
—
199,916
8,028
333,549
6,452
7,340
9,135
—
197
735,780
(18,812)
406,771
351,423
618,817
12,137
—
7,187
—
—
—
203
700,111
—
646,740
(119,927)
7,810
—
7,810
3,833
—
3,833
1,354,864
10,393
1,365,257
1,119,786
7,983
1,127,769
(648,066)
706,798
—
10,393
(648,066)
717,191
(505,196)
614,590
—
7,983
(505,196)
622,573
$ 1,344,939
$
24,829
$ 1,369,768
$ 1,161,531
$
25,462
$ 1,186,993
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Restatement of Financial Statements
All of the financial information presented in “Management’s
Discussion and Analysis of Financial Condition and Results
of Operations,” as well as elsewhere in this Annual Report
has been adjusted to reflect the restatement of our financial
results, as described in “Selected Consolidated Financial
Data,” and Note 2 to our consolidated financial statements
included elsewhere in this Annual Report. The impact
under Accounting Principles Board, or APB, No. 25,
Accounting for Stock Issued to Employees, of recognizing
additional stock-based compensation expense and related
tax effects as a result of our historical stock option granting
practices is $3.1 million ($0.6 million net of income taxes
and other tax charges) in 2005, $6.2 million ($0.4 million
net of income taxes and other tax charges) in 2004, and
Audit Committee has ever served on the Compensation
Committee of the Board of Directors. This voluntary
investigation was not in response to any governmental
investigation, stockholder lawsuit, whistleblower complaint,
or inquiries from media organizations. The investigation
was conducted with the assistance of independent outside
legal counsel and outside forensic accounting consultants,
and covered option grants made to all employees during
the period from January 1996 through December 2006.
Management further evaluated all grants (consisting of two
employee new hire grants) in December 1995, which was
the month we completed our initial public offering, and all
grants to non-employee directors. The investigation and
related review consisted of approximately 191 grant dates
(representing over 27,000 individual option grants and
$156.3 million ($119.9 million net of income taxes and other
approximately 108.7 million stock options).
tax charges) for 2003 and all prior years commencing in
December 1995.
Independent Investigation of Historical Stock Option
Granting Practices
In connection with its investigation, the Audit Committee
retained independent outside legal counsel that had
not previously been engaged by us, to assist in the
investigation. In turn, legal counsel retained outside forensic
As a result of our Audit Committee’s investigation
accounting experts and other consultants to assist it and
of our historical stock option granting practices and
the Audit Committee with financial accounting issues and
management’s review, which has now been completed,
related analytics during the investigation. The investigation
we identified approximately 76.4 million stock option grants
occurred over a period of approximately seven months.
made on 138 grant dates during the period from December
The investigative work conducted by the Audit Committee
1995 to March 31, 2005 for which we used incorrect
included the following tasks, among others:
measurement dates and as a result of revising those
measurement dates, recorded stock-based compensation
expense for financial accounting purposes under APB No.
25. To correct these errors, we have recorded a pre-tax
cumulative charge of $165.7 million ($120.9 million on an
after tax basis) in our consolidated financial statements
through December 31, 2005 to reflect additional stock-
based compensation expense.
Background
On November 30, 2006, after our management conducted
a preliminary, limited scope review of certain of our
stock option granting practices, our Audit Committee
commenced a voluntary, independent investigation
of our historical stock option granting practices and
related accounting during the period from January 1996
through December 2006. None of the members of our
• Reviewing hard copy and electronic files obtained
from us as well as other sources, totaling
approximately 40,000 pages of hard copy
documents and approximately 191,000 electronic
documents, typically consisting of multiple
pages each;
• Conducting more than 50 interviews with
present and former directors who have served
on the Compensation Committee during the
relevant period, present and former members of
senior management, other present and former
employees, and former outside professionals who
had provided legal services to us during the period
of the investigation;
Citrix Systems, Inc.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
•
In connection with its investigation, the members of
our Audit Committee met both telephonically and
in-person numerous times and the Chairman of
the Audit Committee communicated with the Audit
Committee’s counsel on a frequent basis; and
• Engaging outside consultants to conduct various
analyses of our option grants.
Historical Stock Option Granting Practices
Prior to January 1, 2006, we accounted for our stock option
grants under APB No. 25 and had provided the required
disclosures pursuant to the provisions of Statement
of Financial Accounting Standards, or SFAS, No. 123,
Accounting for Stock-Based Compensation . On January 1,
2006, we adopted SFAS No. 123R, Share-Based
Payment, under the modified prospective method. For the
measurement date revisions we have made, we revised
our historical pro forma footnote disclosures in accordance
with SFAS No. 123. Additionally, we adjusted our 2006
consolidated financial statements to reflect the impact of
any revised measurement dates on the compensation cost
recognized in accordance with SFAS No. 123R.
As permitted by the terms of our various stock plans
(as amended and restated from time to time), the
Compensation Committee of our Board of Directors
was vested with the authority to administer and grant
stock options under the plans. Until November 2003,
all employee stock option grants were required to be
approved by the Compensation Committee. Beginning
in November 2003 and continuing to the present, the
Compensation Committee delegated authority, subject to
specific parameters, to our Chief Executive Officer and our
Chief Financial Officer to grant options to non-executive
employees. Grants to Section 16 Officers, to employees
whose compensation was subject to Section 162(m) of the
of the Internal Revenue Code of 1986, as amended, or the
IRC, and other grants outside of the parameters discussed
below continued to require Compensation Committee
approval in order to complete the required granting actions.
In the restatement, for grants requiring Compensation
Committee approval, we generally determined that
Compensation Committee approval was likely obtained
at the next in-person meeting after the date of grant. This
conclusion was based on the fact that Compensation
Committee members recall signing consents in person
at board meetings, that members of management
recalled that it was our objective to present consents to
the Committee at in-person meetings, that the consents
contained in our records typically contain all signatures
on a single page (consistent with having been signed
in person), and that the available meta-data for such
consents generally indicated that the consent forms were
available for signature at that time. We generally used the
in-person board meeting dates when determining revised
measurement dates, because members of management
responsible for approval and processing of these grants
believed or acted as if approval was an important and
required granting action for all grants that were not
subject to the delegation of authority described below.
For example, managers involved in processing grants:
(i) said that they typically refrained from correcting grants
approved by the Committee without further Committee
action; but (ii) believed that alteration or correction of grant
recipient and amount lists prior to Committee approval
was permitted (and performed such corrections and
alterations and did not consider them to be modifications);
and (iii) believed Committee approval was necessary to
grant options. There was some evidence that signatures
were sometimes solicited at such meetings for consents
previously signed and transmitted by fax or other means
but because we did not retain these earlier obtained
consents there was little evidence to indicate for which
grants these approvals were obtained and when they were
received. Where meta-data or other evidence led us to
conclude that approval was not complete at the next in
person meeting, we relied on the other evidence to select
a later date.
From December 1995 through December 2006, the
exercise price for all grants was typically set at the closing
price of our common stock on the original intended grant
date. During this period, we made the following types of
grants of stock options to employees, including officers,
and members of our Board of Directors:
• Annual grants in conjunction with our annual merit
review process, which generally occurred a few
months following our fiscal year end (referred to as
annual grants).
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• Non-annual grants to newly hired and promoted
employees and from time to time to officers in
recognition of performance or as incentives.
Beginning January 2004, we replaced promotion
grants with performance grants that were
granted to employees upon recommendation
by their manager for recognition (new hire and
performance, incentive or promotion grants are
referred to collectively as non-annual grants).
• Options granted or assumed in connection
with acquisitions.
• Options granted to non-employee members of our
Board of Directors.
From December 1995 through mid-1998, all employee
by the Compensation Committee. Until 2002, annual
grants were generally made in July or August of each year
pursuant to a merit evaluation process. Beginning in 2002,
annual grants were split into two grant dates in March and
August. During this period all employee grants required
approval by the Compensation Committee to complete
the required granting actions and for most grants we did
not obtain approval from the Compensation Committee,
typically on unanimous written consent forms, until after the
grant date and for certain grants, we had not completed
the process of identifying the recipients or number of
options to be granted until after the grant date.
Beginning in November 2003, the Compensation
Committee delegated its authority to our Chief Executive
Officer and Chief Financial Officer to issue stock options
grants required approval by the Compensation Committee
pursuant to specific parameters. The delegation provided
to complete the required granting actions. In addition, we
authority to grant no more than 4 million stock options per
did not have a defined process for determining the date on
year in the aggregate and to grant up to 10,000 options
which we made grants and no granting pattern could be
established for grants made during this period. Following
per year to any employee who was not an officer subject
to Section 16 of the Securities Exchange Act of 1934, as
the investigation, the Audit Committee concluded that we
amended, and whose compensation was not subject to
likely set grant dates retrospectively for many stock options
Section 162(m) of the Internal Revenue Code of 1986 as
granted to employees and executives during the 1996 to
amended, or the IRC. In July 2004 the Compensation
mid-1998 period.
Beginning in mid-1998 through late 2003, all employee
grants required approval by the Compensation Committee
to complete the required granting actions. During this
period, we made changes in our stock option granting
practices which included implementing a practice where
we typically dated non-annual grants to non-executives
on the first business day of the month following the start
or promotion date, unless that date was the first day of
the month, in which case the grant date would be that
date. We dated non-annual new hire and promotion
grants to executives either on their start date or the first
business day of the month following the start date or the
promotion date; we awarded the incentive grants on an
ad hoc basis. During this period, we made annual grants
to executive and non-executive employees on dates that
Committee increased that number to 20,000 options per
employee per year. The delegation was also subject to
other parameters, including that each grant be consistent
in number with guidelines that provided the range of
grants that could be awarded to each employee grade.
Compensation Committee approval continued to be a
required granting action for all stock option grants outside
of the parameters of the delegated authority. For grants
outside of the delegation of authority, the Compensation
Committee often approved such grants at a meeting or
by unanimous written consent form. In some cases the
amount granted to each recipient was not final and/or the
Compensation Committee had not approved the grants by
the intended grant date.
We also made grants to the employees of companies we
acquired in connection with acquisitions. Grants made
were typically previously discussed with the Compensation
in conjunction with acquisitions were typically authorized
Committee. However, during these earlier discussions, the
at the time of the Board’s approval of the acquisition.
Compensation Committee did not approve the terms and
The exercise price of such grants was typically set at the
allocation of grants to individual recipients or delegate to
closing stock price of our common stock on the closing
management the authority to do so without further action
date of the acquisition. During the investigation, we noted
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
one grant date where the grant was approved by our Board
We completed a grant date by grant date analysis of
of Directors in conjunction with the acquisition; however,
approximately 191 option grant dates during the relevant
we had not completed the required granting actions by the
period for compliance with APB No. 25. Each individual
stated grant date and the measurement date was revised
grant on each grant date was evaluated based on its
to the date that the evidence indicated that we completed
particular facts and circumstances. Where we determined
our allocation.
We also grant options to the non-employee members of
our Board of Directors, or the Board Grants, pursuant to a
stockholder approved plan, as amended from time to time.
The timing of the grant date and amount of such awards
was granted pre-determined pursuant to a formula set
forth either in the terms of the plan or via board resolution.
Certain Board Grants were issued on a date other than the
automatic grant date prescribed by the plan or differed by
nominal amounts from the option amount pre-determined
by the plan formula.
Prior to the restatement discussed below, we used the
grant dates as set forth above as the measurement date
for financial accounting purposes. Accordingly, in each
case the exercise price did not exceed the closing stock
price of our common stock on that date, and we did not
record stock-based compensation expense in connection
with these grants. In the restatement, we revised the
measurement dates for many grants and recorded
stock-based compensation expense when the revised
measurement date resulted in intrinsic value which we
accounted for in the restatement.
Adjustments to Measurement Dates Arising from Errors
Identified by Audit Committee Investigation
Based on the facts obtained as a result of the Audit
Committee’s investigation, we identified certain grants for
that we did not complete the required granting actions by
the original grant date, we used judgment to determine
corrected measurement dates consistent with what the
evidence suggested was our practice or process or other
information obtained as part of the investigation that
suggested the date upon which all requirements for a
measurement date had been satisfied under applicable
accounting principles. If the measurement date was not
the same date we used previously, we made accounting
adjustments as required, which resulted in stock-based
compensation and related tax effects when an option had
intrinsic value on the revised measurement date.
The documents and information considered in connection
with the measurement date adjustments that we have
made included, but was not limited to:
• minutes of Board of Directors and Compensation
Committee meetings and related presentations;
• unanimous written consents signed by the
Compensation Committee members, and evidence
relating to the date such consents were created
and circulated for signature and/or signed;
•
information contained in personnel files maintained
for employees who were granted options;
• electronic mail messages and other electronic files
retrieved from our computer system and in back
which we used an incorrect measurement date for financial
up media;
accounting purposes, as defined under Generally Accepted
Accounting Principles in the United States, or GAAP. To
determine the correct measurement dates for these grants
under applicable accounting principles, we followed the
guidance in APB No. 25, which deems the “measurement
date” to be the first date on which all of the following
are known with finality: (1) the identity of the individual
• documentation prepared in connection with our
annual performance reviews of employees as part
of the process of determining the allocation of
stock option grants to individual employees;
•
information as to the date of hire of the employee
receiving the option grant, including (if the grant
employee who is entitled to receive the option grant; (2) the
was a new hire grant) the date of any offer letter;
number of options that the individual employee is entitled to
receive; and (3) the option’s exercise price.
• correspondence, memoranda and other
documentation supporting the option grant;
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•
•
information concerning the date or dates on which
a stock option was entered into our stock option
tracking system, Equity Edge;
information obtained during interviews conducted
by the Audit Committee’s outside counsel of
numerous individuals, including current and
former officers, directors, employees and outside
professionals; and
• analyses of our option grant performed
by consultants engaged on behalf of the
Audit Committee.
Consistent with current accounting literature and published
guidance from the staff of the SEC, we classified grants
during the eleven-year period subject to the investigation
into categories based on grant type and process by
which the grant was finalized. The principal categories
related to annual and non-annual grants in three time
periods: (1) January 1996 through May 1998; (2) May 1998
through November 2003; and (3) November 2003 through
December 2006. We also separately categorized grants
to non-employee directors. The last grant with a revised
measurement date was awarded in March 2005.There were
no revised measurement dates in 2006. A summary of pre-
tax stock-based compensation expense related to options
awarded in each time period, in thousands, is as follows:
Time Period
January 1996 through May 1998 (includes two grants made in December 1995)
May 1998 through November 2003
November 2003 through December 2005
Cumulative effect at December 31, 2005
Pre-Tax
Stock-based
Compensation
Expense
$ 62,171
103,272
224
$ 165,667
January 1996 – May 1998: In the restatement, we corrected
generally used the date of the first in-person Board of
the measurement dates for all 50 original grants dates
Directors meeting after the evidence suggested that the
during this period, consisting of approximately 24.2 million
amount and terms of the grant were final as the revised
options. We also revised measurement dates for all grants
measurement date for financial accounting purposes.
(consisting of two employee new hire grants) in December
Where evidence existed of advance approval by the
1995, which was the month we completed our initial
Compensation Committee (such as facsimile header dates
public offering.
After completion of its investigation, the Audit Committee
concluded that we likely selected grant dates retrospective
for many stock options granted to employees and
executives during the January 1996 through May 1998
on signed unanimous written consent forms), we used
this information as evidence of when the Compensation
Committee approval was obtained, and used that
date as the revised measurement date for financial
accounting purposes.
period. In addition, the required granting actions for
May 1998 – November 2003: During this period we issued
many of these grants were not completed on the original
approximately 70.5 million options over 87 grant dates.
measurement date. During this period, a substantial
In the restatement, we corrected measurement dates for
majority of the grants were approved using unanimous
approximately 50.6 million options granted on 79 of the 87
written consent forms signed by the Compensation
grants dates. We made these corrections because we did not
Committee for which, in most cases, there was no
complete the required granting actions by the original grant
documentary evidence of when approval was obtained. As
date, including, obtaining approvals from the Compensation
discussed above, for grants where there was insufficient
Committee and not finalizing the amounts or recipients as of
evidence to determine when approval was obtained, we
the original grant date.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
During this period, a substantial majority of the grants were
We revised the measurement date for the non-executive
approved using unanimous written consent forms signed
annual grant originally dated April 1, 2004. The grant was
by the Compensation Committee for which, in most cases,
issued pursuant to the delegation of authority above and
there was no documentary evidence of when approval
was revised because we had not completed the process
was actually obtained. As discussed above, where there
of determining grant amounts and recipients until after
was insufficient evidence to determine when approval
the grant date. We determined revised measurement
conclusively was obtained, we generally used the date
dates for each individual recipient through May 20, 2004
of the first in-person Board of Directors meeting after the
by assessing when each grant was fixed with finality as
evidence suggested that the amount and terms of the grant
reflected in hard copy and electronic documents and other
were final as determined by management as the revised
information. This was the only grant date that options
measurement date for financial accounting purposes.
issued under delegated authority were revised and we
However, if there was evidence sufficient for us to conclude
recognized total pre-tax stock compensation expense of
that the required granting actions were completed on
approximately $0.2 million related to this grant.
a date that was earlier than the next in-person Board
meeting, in accordance with APB No. 25, we set the
revised measurement date at the earlier date.
Compensation Committee approval continued to be a
required granting action for all stock option grants outside
of the parameters of the delegated authority, as described
November 2003 – December 2006: Beginning in November
above. For grants outside of the delegation of authority,
2003, we granted 9.5 million options to employees on 42
the Compensation Committee typically approved such
grant dates pursuant to delegated authority described
grants at a meeting or by unanimous written consent form.
above. In virtually all cases these grants were made on
During this period, the Compensation Committee approved
predetermined annual grant dates or the first business
2.6 million options on 19 grant dates. We determined
day of the month following the employee’s hire date or
that for seven of these grant dates, the original grant
performance recognition and were issued pursuant to an
date differed from the appropriate measurement date for
underlying system of processes, controls and management
financial accounting purposes. We recorded approximately
approvals. After the award was communicated to the
$32,000 in pre-tax stock-based compensation expense
employee and the administrative processes were complete
related to these grants. The last grant for which we revised
the CFO signed an internal delegation of authority form
the measurement date was March 1, 2005.
after the grant date. We concluded that the CFO’s
signature on these documents was perfunctory and
was not a required granting action. During this period,
approximately 3% of the individual non-executive employee
grants (or 7% of the total non-executive employee options)
awarded pursuant to the delegation process exceeded
the delegation limitations discussed above and should
have been presented for approval by the Compensation
Committee. Although these grants were not approved by
the Compensation Committee, they were communicated
to employees and processed pursuant to the same system
of processes, controls and management approvals as
Board Grants. From 1996 through 2006, we made 48
grants to non-employee directors on 21 grant dates for a
total of 3.1 million options. We revised the measurement
dates for certain of these grants because they were
awarded on dates other than the automatic dates
prescribed in the applicable stockholder plan and in
amounts that differed nominally from the formulas set forth
in the plan. We recognized approximately $0.5 million in
pre-tax stock-based compensation expense related to the
following grants:
• We awarded to non-employee directors an
grants within the limitations. We have concluded that these
aggregate of 0.7 million options on five grant dates
grants were legally outstanding and that the requirements
to establish a measurement date were met on the original
grant date.
between 1998 and 2002. Instead of awarding
these options on the anniversary date of the
directors’ appointment to the Board, they were
awarded on the first day of the month containing
the directors’ anniversary date, in error. These
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options were issued between three and 21 days
later approval by the Compensation Committee. In other
in advance of the actual anniversary date. We
instances, we issued options that were different in amount
determined that the grants were not fixed with
than that approved by the Compensation Committee or
finality until the anniversary date prescribed by
issued options for which we were unable to locate the
the plan because that date represents the date on
approval documentation during the investigation. In each of
which approval existed pursuant to the stockholder
these circumstances, we evaluated the existing information
approved plan. We revised the measurement dates
related to each individual grant and we established a new
accordingly, and recognized pre-tax compensation
measurement date when we determined that the terms of
expense of $0.5 million representing the difference
the award were fixed with finality.
in intrinsic value between grant date prescribed by
the plan and the original grant date.
• We awarded approximately 0.1 million options
in June 2002 to non-employee directors. The
Impact of the Errors on our Financial Statements
We have determined that after accounting for forfeitures,
the errors described above resulted in an understatement
of stock-based compensation expense over the vesting
grant was one day later than the automatic date
terms of the grants corrected. Most of the adjusted
prescribed by the stockholder approved plan and
measurement dates were with respect to grants made prior
the number of options were nominally different
from the plan formula (aggregate difference of
to December 31, 2004. We recorded pre-tax stock-based
compensation expense of approximately $3.1 million and
770 options). Based on the available evidence, we
$6.2 million for the years ended December 31, 2005 and
concluded that the grant date error constituted
2004, respectively, and $156.3 million related to years
a modification of the automatic grant that should
prior to fiscal 2004. There was no impact on revenue or
have occurred on the previous day. We concluded
cash and investments as a result of this additional stock
that the grant was fixed with finality on the date
compensation expense and the adjustments related to our
awarded and the dating error and share differences
historical stock option granting practices.
resulted in compensation expense of approximately
$5,000, representing the difference in the intrinsic
value between the automatic grant date prescribed
by the plan and the original grant date.
•
In 2000, we awarded an anniversary grant for
As a result of the review, we determined that we failed
to properly withhold employment (the employee and our
portions of FICA and supplemental federal withholding)
taxes associated with certain stock option exercises. We
recorded such amounts in the consolidated statements of
approximately 0.2 million options in error one year
income in the period in which we were originally obligated
after the actual anniversary date of the director.
We considered the grant a modification of the
to make the withholding. Additionally, for tax years where
the statute of limitations has lapsed, we have recorded
prescribed automatic grant under the stockholder
the reduction in previously recorded liabilities in the period
approved plan and concluded that the grant was
the statute of limitations expires. We have recorded
fixed with finality on the grant date. However, no
approximately $8.0 million, net of income tax, through
compensation expense resulted as the closing
December 31, 2006 for employment taxes and
price of our common stock increased from the
related charges.
automatic grant date to the grant date of the award.
Additionally, we believe that United States income tax
Other Measurement Date Judgments
deductions taken for stock option exercises in prior
We identified other circumstances related to approximately
years, which pertained to certain executives, may
4.2 million options (approximately 3.8% of options issued)
not be deductible under limitations imposed by IRC
that resulted in revised measurement dates. In some
Section 162(m). Section 162(m) limits the deductibility of
instances, we made changes after the grant date to add
compensation above $1 million to certain executive officers
individuals to the list of grant recipients and received
of public companies when such compensation is not
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
incentive based. As a result, we have reduced our available
The additional compensation expense in 2004 and 2005
tax net operating loss carry-forwards arising from certain
reflected below primarily relates to the impact of vesting of
previously exercised stock options. We restated our tax
awards granted prior to 2004. A summary of total charges,
provisions in the periods in which the benefits
including estimated employment related tax charges, which
were recorded.
are comprised of withholding taxes, penalties and interest,
by fiscal period, in thousands, is as follows:
Year Ended December 31,
1996
1997
1998
1999
2000
2001
2002
2003
Cumulative effect at December 31, 2003
2004
2005
Pre-Tax
Expense
Employment
Related
Tax Charges
$
1,826
6,509
14,598
24,557
40,627
34,926
20,271
12,985
156,299
6,226
3,142
$
—
128
1,221
4,819
8,069
4,073
(830)
(3,042)
14,438
(6,031)
(2,127)
$
Income
Taxes
(689)
(2,526)
(4,442)
(8,411)
(14,019)
(11,844)
(5,837)
(3,042)
(50,810)
161
(423)
Net
Charge
to Net
Income
$
1,137
4,111
11,377
20,965
34,677
27,155
13,604
6,901
119,927
356
592
Total
$ 165,667
$ 6,280
$ (51,072)
$ 120,875
In addition, to the amounts reflected above, for the year
2004 was not material. The total pre-tax stock-based
ended December 31, 2005, we had previously recognized
compensation expense for the period from January 1, 1996
$4.3 million in stock-based compensation expense
through December 31, 2005 was approximately
related to stock-based awards. Accordingly, the total
$170.0 million.
pre-tax stock-based compensation expense for 2005 was
approximately $7.4 million. Previously recorded stock-
based compensation expense, if any, for each of the
years ended December 31, 1996 through December 31,
The following table reflects the impacts of the restatement
adjustments on our consolidated statements of income for
the periods presented below (in thousands):
Category of Adjustments:
2005
2004
Pre-tax stock-based compensation expense related to stock
option measurement date changes
Other tax charges
Income tax impact on other tax charges
Income tax adjustments related to IRC Section 162(m)
Income tax impact related to stock option compensation expense
$ 3,142
(2,127)
727
(288)
$
6,226
(6,031)
1,963
—
date changes
Total income tax adjustments
Total charge to net income
(862)
(423)
$
592
$
(1,802)
161
356
22
Cumulative Effect from
January 1, 1996 through
December 31, 2003
$ 156,299
14,438
(3,848)
494
(47,456)
(50,810)
$ 119,927
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The cumulative effect of the restatement adjustments
to have been completed based on documentary evidence,
on the consolidated balance sheet at December 31,
such as (for example) e-mails, electronic and printed
2005 was an increase in additional paid-in capital, offset
dating evidence on grant recommendation listings and the
by a corresponding decrease in retained earnings and
metadata creation dates on unanimous written consent
deferred compensation, which results in no net effect on
forms. In the few cases where there was some evidence
stockholders’ equity. There were also adjustments made
suggesting the possibility that the grant had been approved
to increase our short and long-term deferred tax assets
after the revised measurement date, the end date was
and our accrued expenses due to the tax effects of the
subsequent to the revised measurement date. Based on
restatement. The adjustments decreased previously
all available evidence, such as (for example) unanimous
reported basic net income per share by $0.01 for the
written consents, email dates, and Board of Director or
year ended December 31, 2005 and had no impact on
committee meeting dates, we were unable to identify dates
previously reported basic net income per share for the
that would provide a more reasonable range of dates for
year ended December 31, 2004. The adjustments had no
this sensitivity analysis. While we believe the evidence and
impact on previously reported diluted net income per share
methodology used to determine the revised measurement
for the years ended December 31, 2005 and 2004.
dates to be the most appropriate, we also believe that
Judgment
Most of the revised measurement dates could not be
determined with certainty, and we made judgments,
as described above, to establish the revised dates.
Judgments different from those used by us regarding
illustrating differences in stock-based compensation
expense using these alternative date ranges provides some
insight into the extent to which hypothetical stock-based
compensation expense would have fluctuated if we chose
other dates.
the timing of the revised measurement dates would have
After developing the range for each grant event, we
resulted in different compensation expense charges than
selected the highest closing price of our stock within
those recorded by us in the restatement. We therefore
the range and calculated the difference in stock-based
prepared a sensitivity analysis to determine the hypothetical
compensation expense to determine the maximum
minimum and maximum compensation expense charge
possible compensation expense. We then selected the
that could occur if different judgments to determine the
lowest closing price within the range and calculated the
revised measurement dates were used. We provided a
difference in stock-based compensation expense to
minimum and maximum range to the sensitivity analysis as
determine the minimum possible compensation expense. If
a result of significant volatility in prices versus the revised
the low closing price was less than the closing price on the
measurement date prices. In reviewing all available data,
original date of grant, there was no resulting compensation
we considered other possible alternative grant dates for
charge. We compared these aggregated amounts to the
determining a sensitivity analysis, but were unable to find
stock-based compensation that we recorded. If we had
any such data or evidence that would provide an alternative
used the highest closing price of our stock within the range,
we believed to be better than the one we selected.
our total restated stock-based compensation adjustment
We applied our sensitivity methodology on a grant date
by grant date basis to examine the largest hypothetical
variations in stock-based compensation expense within a
range of possible approval dates for each grant event. We
developed this range by generally using the date that the
relating to the revision in measurement dates would
have been increased by approximately $183.5 million.
Conversely, had we used the lowest closing price of our
stock within the range, our total restated compensation
expense would have decreased by $133.9 million.
allocation and recipients were determined to be final as the
Our hypothetical ranges of stock-based compensation
earliest possible date and the revised measurement date as
expense were affected by the high level of volatility in our
the end date. In some cases, the earliest possible date was
stock price and the date ranges used in our sensitivity
the original date of grant, while for others it was a date that
analysis, generally the time period between the original
the allocation and recipients were subsequently determined
grant dates of certain stock options and the revised
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
measurement dates. For example, in 1999 (the year in our
The following tables set forth the effect on earnings
restatement period with the largest sensitivity range based
before income taxes (net of estimated forfeitures) that
on option grant date), our stock price closed at a low of
would result from using different alternate measurement
$14.65 per share and a high of $77.50 per share during the
date determinations as compared to the measurement
range of potential alternative measurement dates. In 2000
date selected in our evaluation and used for accounting
(the year in our restatement period with the second largest
purposes. The first table, titled “Sensitivity Analysis by
sensitivity range based on option grant date), our stock
Option Grant Year” illustrates actual pre-tax stock-based
price closed at a low of $14.31 per share and a high of
compensation expense and the hypothetical stock-
$105.44 per share during the range of potential alternative
based compensation expense based on the year each
measurement dates. Since we do not have evidence that
option in the restatement was granted. The second
the grant dates and exercise prices were selected on the
table, titled “Sensitivity Analysis by Option Vest Year”
date when our stock price was at its highest or lowest
illustrates the actual amortization of the pre-tax stock-
during each period, we concluded that selecting a revised
based compensation recognized in our consolidated
measurement date on the “highest” or “lowest” closing
financial statements and the hypothetical stock-based
price when measuring compensation expense would not
compensation expense in the period that the options are
have been consistent with the requirements of APB No. 25,
earned. The difference in the total compensation set forth
which looks to the “first date” on which the terms of the
in each table is due to stock-based compensation that will
grants were fixed with finality.
be expensed in future periods when earned.
Sensitivity Analysis by Option Grant Year
(In thousands)
Hypothetical
Compensation
Expense Based on
Lowest Closing Price
Within Range of
Potential Alternative
Measurement Dates
Hypothetical
Compensation
Expense Based on
Highest Closing
Price Within Range
of Potential
Alternative
Measurement Dates
Pre-Tax Expense
Based on Selected
Revised Measurement
Dates
$
239
19,408
14,959
40,061
63,867
7,451
11,630
1,999
5,829
224
—
$
—
3,462
—
9,173
14,708
293
1,428
828
1,897
—
—
$
274
23,938
19,486
55,473
136,265
69,064
14,522
10,373
19,009
674
133
$ 165,667
$ 31,789
$ 349,211
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Total
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Sensitivity Analysis by Option Vest Year
(in thousands)
Pre-Tax Expense
Based on Selected
Revised Measurement
Dates
Hypothetical
Compensation
Expense Based on
Lowest Closing Price
Within Range of
Potential Alternative
Measurement Dates
Hypothetical
Compensation
Expense Based on
Highest Closing Price
Within Range of
Potential Alternative
Measurement Dates
$
1,826
6,509
14,598
24,557
40,627
34,926
20,271
12,985
6,226
3,142
$
322
943
2,032
4,511
8,302
6,718
3,972
2,610
1,145
762
$
2,251
8,199
19,018
35,404
77,016
86,136
50,597
37,002
19,976
8,546
$ 165,667
$ 31,317
$ 344,145
Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Total
For more information regarding the restatement see
collectively, the 2006 Acquisitions. The 2006 Acquisitions
Note 2 to our consolidated financial statements included
strengthen our Application Delivery Infrastructure products
elsewhere in this Annual Report.
Overview
We design, develop and market technology solutions that
allow applications to be delivered, supported and shared
on-demand with high performance, enhanced security
and improved total cost of ownership, or TCO. We market
and license our products through multiple channels such
as value-added resellers, channel distributors, system
integrators, independent software vendors, our Websites
and original equipment manufacturers.
2006 Acquisitions
which are designed to offer comprehensive solutions
across all dimensions of application delivery. The total
consideration for the 2006 Acquisitions was $68.0 million
comprised of cash paid of $65.1 million and other costs
related primarily to estimated direct transaction costs
of $2.9 million. As part of our 2006 Acquisitions, we
assumed approximately 0.4 million non-vested stock-
based awards upon the closing of the transactions. See
Note 7 to our consolidated financial statements included
elsewhere in this Annual Report for more information
regarding the stock-based awards assumed. The results
of operations of the 2006 Acquisitions are included as
During 2006, we acquired all of the issued and outstanding
part of our results beginning after their respective dates
capital stock of two privately held companies, Reflectent
of acquisition. Revenues from the acquired products
Software, Inc., a provider of solutions to monitor the
are primarily included in our Product License revenue
real-time performance of client-server, Web and desktop
and Technical Services revenue in the accompanying
applications from an end-user perspective, and Orbital
consolidated statements of income. The sources of funds
Data Corporation, a provider of solutions that optimize
for consideration paid in these transactions consisted of
the delivery of applications over wide area networks,
available cash and investments.
Citrix Systems, Inc.
2006 Annual Report
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Under the purchase method of accounting, the purchase
based on their estimated fair values as of the date of the
price for the 2006 Acquisitions was allocated to the
completion of the acquisition. The allocation of the total
acquired companies’ net tangible and intangible assets
purchase price is summarized below (in thousands):
Current assets
Property and equipment
Other assets
In-process research and development
Intangible assets
Goodwill
Assets acquired
Current liabilities assumed
Net assets acquired, including direct transaction costs
Purchase Price
Allocation
Asset
Life
Various
3-6 years
Indefinite
$ 5,153
1,595
4,543
1,000
20,910
44,353
77,554
(9,530)
$ 68,024
Current assets acquired and current liabilities assumed in
recorded in relation to the 2006 Acquisitions was assigned
connection with the 2006 Acquisitions consisted mainly
to the Americas segment and is not deductible for
of short-term investments, accounts receivable, inventory,
tax purposes.
other accrued expenses, short-term debt and deferred
revenues. Other assets consisted primarily of deferred
tax assets.
Intangible assets acquired in the 2006 Acquisitions are
2005 Acquisitions
During 2005, we acquired all of the issued and outstanding
capital stock of two privately held companies, NetScaler,
Inc. and Teros, Inc., collectively, the 2005 Acquisitions, for
comprised of core technologies, customer relationships,
a total of $172.8 million in cash, 6.6 million shares of our
trade name and covenants not to compete. The valuation
common stock valued at $154.8 million and estimated
of the acquired technologies was based on the estimated
direct transaction costs of $6.2 million. We also assumed
discounted future cash flows associated with the acquired
approximately $20.6 million in non-vested stock-based
companies’ existing products. The value of customer
relationships was determined based on the acquired
companies’ estimated future discounted cash flows of
the relationships in place after considering historical
and expected buying patterns of customers, expected
cash flows from current customers, the duration of
compensation upon the closing of the NetScaler, Inc.,
or NetScaler, transaction that was accounted for in
accordance with FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation (an
Interpretation of APB Opinion No. 25) and was recorded
as deferred compensation in the accompanying 2005
support contracts and the application of charges of other
consolidated balance sheet . The assumed awards
contributory assets. The valuation of the trade name for the
had an excess of fair value over intrinsic value of $0.5
2006 Acquisitions was determined based on assigning a
million, which is reflected in the total consideration for
royalty rate to the revenue stream that was expected from
the transaction. The 2005 Acquisitions further extend
the products using the trade names. The pre-tax royalty
our Application Delivery Infrastructure, which is designed
rate was applied to the product revenue and discounted to
to offer comprehensive solutions across all dimensions
a present value. The value of the covenants not to compete
of application delivery. The results of operations of the
was determined by using a discounted income approach
acquired companies are included as part of our results
that considered the value of the agreements in place
beginning after their respective dates of acquisition and
adjusted for competition, among other things. The goodwill
revenues from the acquired products are included in our
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Product License revenue and Technical Services revenue
Purchased in-process research and development, or
in the accompanying consolidated statements of income.
IPR&D, of $1.0 million, $7.0 million and $19.1 million was
In connection with the 2005 Acquisitions, we allocated
expensed immediately upon the closing of our 2006
$230.0 million to goodwill, $40.2 million to core technology
Acquisitions, 2005 Acquisitions and 2004 Acquisitions,
and $35.8 million to other intangible assets. We assigned
respectively, in accordance with FASB Interpretation
all of the goodwill to our Americas segment.
No. 4, Applicability of FASB Statement No. 2 to Business
2004 Acquisitions
During 2004, we acquired all of the issued and outstanding
capital stock of two privately held companies, Net6,
Inc., a leader in providing secure access gateways and
Expertcity.com, Inc., a leader in Web-based desktop
access, as well as, a leader in Web-based meeting
and customer assistance services, together, the 2004
Acquisitions. The consideration for the 2004 Acquisitions
was $291.0 million, comprised of $161.8 million in cash,
$6.1 million of direct transaction costs and 5.8 million
shares of our common stock valued at $124.8 million.
The common stock valued at $124.8 million included
$118.0 million related to the initial purchase price and
the remaining balance is primarily related to additional
common stock earned by the former stockholders of
Expertcity.com, Inc. upon the achievement of certain
Combinations Accounted for by the Purchase Method,
due to the fact that it pertained to technology that was
not currently technologically feasible, meaning it had not
reached the working model stage, did not contain all of
the major functions planned for the product, was not ready
for initial customer testing and had no alternative future
use. The fair value assigned to in-process research and
development was determined using the income approach,
which includes estimating the revenue and expenses
associated with a project’s sales cycle and by estimating
the amount of after-tax cash flows attributable to the
projects. The future cash flows were discounted to present
value utilizing an appropriate risk-adjusted rate of return,
which ranged from 17%–25%. The rate of return included a
factor that takes into account the uncertainty surrounding
the successful development of the IPR&D.
revenue and other financial milestones during 2004
Ardence Delaware, Inc., Acquisition
pursuant to the applicable merger agreement, which was
On January 5, 2007, we acquired all of the issued and
issued in March 2005. The fair value of the common stock
outstanding capital stock of Ardence Delaware, Inc., or
earned as additional purchase price consideration was
Ardence, a leading provider of solutions that allow IT
recorded as goodwill on the date earned. In connection
administrators to set up and configure PCs, servers, and
with the 2004 Acquisitions, we allocated $195.1 million to
Web servers in real time from a centrally managed source.
goodwill, $38.7 million to core and product technology
This acquisition strengthens our application delivery
and $32.4 million to other intangible assets. We assigned
capabilities with more robust streaming and provisioning
$31.7 million of the goodwill to our Americas segment and
technologies that improve IT agility, increase security and
$163.4 million of the goodwill to our Citrix Online Division.
reliability, and offer new options for how businesses deliver
The sources of funds for consideration paid in these
applications and desktops to end-users. The consideration
transactions consisted of available cash and investments
paid to the stockholders of Ardence in this transaction
and our authorized common stock. There is no additional
was cash of approximately $50.6 million. In addition, we
contingent consideration related to these acquisitions.
incurred approximately $2.0 million in acquisition related
Purchase Accounting for Acquisitions
The fair values used in determining the purchase price
allocation for certain intangible assets for our acquisitions
were based on estimated discounted future cash flows,
royalty rates and historical data, among other information.
costs and we assumed approximately 0.2 million unvested
stock-based instruments, each of which will be exercisable
for the right to receive one share of our common stock
upon vesting.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Xensource, Inc., Acquistion
Rosen funds related to the acquisition of XenSource is
On August 14, 2007, we signed a definitive agreement
approximately $1.9 million. Mr. Dow has been on our Board
to acquire XenSource, Inc., or XenSource, a privately
of Directors since 1989 and currently owns 262,349 shares
held leader in enterprise-grade virtual infrastructure
of our common stock. Mr. Dow did not attend the meeting
solutions. The acquisition will move us into adjacent
at which our Board approved the transaction and recused
server and desktop virtualization markets that will allow
himself from the vote to approve the transaction. Consistent
us to extend our leadership in the broader Application
with our policies and the charter of the Nominating
Delivery Infrastructure market by adding key enabling
and Corporate Governance Committee of our Board of
technologies that make the end-to-end computing
Directors, the acquisition of XenSource was reviewed and
environment more flexible, dynamic and responsive to
approved by the Nominating and Corporate Governance
business change. The closing of the acquisition is targeted
Committee. There are no material relationships among
for the fourth quarter of 2007 and is subject to XenSource
us and XenSource or any of their respective affiliates or
stockholder and regulatory approvals. The acquisition has
any of the parties to the agreement to acquire XenSource
received clearance under the Hart-Scott-Rodino Antitrust
and related agreements, other than in respect of such
Improvements Act of 1976. We plan to fund the acquisition
agreements themselves and as disclosed herein.
through the use of our available cash and stock. In
accordance with the terms of the agreement, we will issue
approximately 4.2 million shares of our common stock
to the stockholders of XenSource and they will receive
approximately $175.5 million in cash consideration. The
number of shares, however, could increase to 6.5 million
and the cash consideration could decrease to $92.5 million
if certain conditions in the agreement are satisfied prior
to the closing of the acquisition. In addition, in connection
with the acquisition we will issue approximately 1.4 million
unvested shares of our common stock and we will assume
approximately 3.4 million stock options each of which will
be exercisable for the right to receive one share of our
common stock upon vesting. Transaction costs associated
with the acquisition are currently estimated at $3.7 million.
In addition, we estimate that we will expense approximately
$8.0 to $10.0 million in IPR&D upon the closing of
the transaction.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and
results of operations are based upon our 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 us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure
of contingent liabilities. We base these estimates on our
historical experience and on various other assumptions
that we believe to be reasonable under the circumstances,
and these estimates form the basis for our judgments
concerning the carrying values of assets and liabilities
that are not readily apparent from other sources. We
periodically evaluate these estimates and judgments based
on available information and experience. Actual results
could differ from our estimates under different assumptions
The Sevin Rosen funds, a venture capital firm, is a
and conditions. If actual results significantly differ from our
stockholder in XenSource. Stephen Dow, a member of our
estimates, our financial condition and results of operations
Board of Directors, is a general partner of the Sevin Rosen
could be materially impacted.
funds and does not directly hold any interest in XenSource.
Although the Sevin Rosen funds are represented on the
Board of Directors of XenSource, Mr. Dow is not a director
of XenSource. Our acquisition of XenSource, if closed
will provide a return to all the partners of the Sevin Rosen
funds, including Mr. Dow. Subject to certain assumptions,
we currently estimate that the potential allocation to
Mr. Dow through the general partner entities of the Sevin
We believe that the accounting policies described below
are critical to understanding our business, results of
operations and financial condition because they involve
more significant judgments and estimates used in the
preparation of our consolidated financial statements. An
accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions
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about matters that are highly uncertain at the time the
We allocate revenue to license updates and any other
estimate is made, and if different estimates that could have
undelivered elements of the arrangement based on vendor
been used, or changes in the accounting estimates that
specific objective evidence, or VSOE, of fair value of each
are reasonably likely to occur periodically, could materially
element and such amounts are deferred until the applicable
impact our consolidated financial statements. We have
delivery criteria and other revenue recognition criteria have
discussed the development, selection and application of
been met. The balance of the revenue, net of any discounts
our critical accounting policies with the Audit Committee
inherent in the arrangement, is recognized at the outset of
of our Board of Directors and our independent auditors,
the arrangement using the residual method as the product
and our Audit Committee has reviewed our disclosure
licenses are delivered. If we cannot objectively determine
relating to our critical accounting policies and estimates in
the fair value of each undelivered element based on the
this “Management’s Discussion and Analysis of Financial
VSOE fair value, we defer revenue recognition until all
Condition and Results of Operations.”
elements are delivered, all services have been performed,
Other significant accounting policies, primarily those with
lower levels of uncertainty than those discussed below, are
also important to understanding our consolidated financial
statements. The notes to our consolidated financial
statements contain additional information related to our
or until fair value can be objectively determined. We
must apply judgment in determining all elements of the
arrangement and in determining the VSOE of fair value
for each element, considering the price charged for each
product or applicable renewal rates for license updates.
accounting policies and should be read in conjunction with
In the normal course of business, we do not permit
this discussion.
Revenue Recognition
The accounting related to revenue recognition in
the software industry is complex and affected by
interpretations of the rules and an understanding of
industry practices, both of which are subject to change.
As a result, revenue recognition accounting rules require
us to make significant judgments. In addition, our judgment
is required in assessing the probability of collection, which
is generally based on evaluation of customer-specific
information, historical collection experience and economic
market conditions. If market conditions decline, or if
the financial condition of our distributors or customers
deteriorate, we may be unable to determine that
collectibility is probable, and we could be required to defer
the recognition of revenue until we receive
customer payments.
product returns, but we do provide most of our distributors
with stock balancing and price protection rights. Stock
balancing rights permit distributors to return products to
us up to the forty-fifth day of the fiscal quarter, subject
to ordering an equal dollar amount of our other products
prior to the last day of the same fiscal quarter. Price
protection rights require that we grant retroactive price
adjustments for inventories of our products held by
distributors or resellers if we lower our prices for such
products. We establish provisions for estimated returns
for stock balancing and price protection rights, as well as
other sales allowances, concurrently with the recognition
of revenue. The provisions are established based upon
consideration of a variety of factors, including, among other
things, recent and historical return rates for both specific
products and distributors, estimated distributor inventory
levels by product, the impact of any new product releases
and projected economic conditions. Actual product returns
We license most of our products bundled with a one year
for stock balancing and price protection provisions incurred
contract for license updates that provide the end-user with
are, however, dependent upon future events, including
free enhancements and upgrades to the licensed product
the amount of stock balancing activity by our distributors
on a when and if available basis. Customers may also
and the level of distributor inventories at the time of any
elect to purchase subscriptions for license updates, when
price adjustments. We continually monitor the factors
not bundled with the initial product release or purchase,
that influence the pricing of our products and distributor
technical support, product training or consulting services.
inventory levels and make adjustments to these provisions
Citrix Systems, Inc.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
when we believe actual returns and other allowances could
modified-prospective method prior periods are not revised
differ from established reserves. Our ability to recognize
for comparative purposes. Under the fair value recognition
revenue upon shipment to our distributors is predicated
provisions of SFAS No. 123R, stock-based compensation
on our ability to reliably estimate future stock balancing
cost is measured at the grant date based on the fair value
returns. If actual experience or changes in market condition
of the award and is recognized as expense on a straight-
impairs our ability to estimate returns, we would be required
line basis over the requisite service period, which is the
to defer the recognition of revenue until the delivery of
vesting period.
the product to the end-user. Allowances for estimated
product returns amounted to approximately $1.7 million
at December 31, 2006 and $2.3 million at December 31,
2005. We have not reduced and have no current plans to
reduce our prices for inventory currently held by distributors
or resellers. Accordingly, there were no reserves
required for price protection at December 31, 2006 and
December 31, 2005. We also record reductions to revenue
for customer programs and incentive offerings including
volume-based incentives, at the time the sale is recorded.
If market conditions were to decline, we could take actions
We currently use the Black-Scholes option pricing model
to determine the fair value of stock options and employee
stock purchase plan shares. The determination of the fair
value of stock-based payment awards on the date of grant
using an option-pricing model is affected by our stock price
as well as assumptions regarding a number of complex
and subjective variables. These variables include our
expected stock price volatility over the term of the awards,
the expected term of the award, the risk-free interest rate
and any expected dividends.
to increase our customer incentive offerings, which could
For purposes of determining the expected volatility factor,
result in an incremental reduction to our revenue at the time
we considered the implied volatility in two-year market-
the incentive is offered.
Stock-Based Compensation
We adopted the provisions of Statement of Financial
Accounting Standards, or SFAS, No. 123R, Share-Based
Payment on January 1, 2006, the effective date for such
adoption . Prior to January 1, 2006, we accounted for our
stock-based compensation plans under the recognition
and measurement provisions of Accounting Principles
Board (“APB”) Opinion No. 25, Accounting for Stock
Issued to Employees , and related Interpretations, as
permitted by SFAS No. 123, Accounting for Stock-Based
Compensation . We did not recognize compensation cost
related to stock options granted to our employees and
non-employee directors that had an exercise price equal
to or above the market value of the underlying common
stock on the date of grant in our consolidated statement of
income prior to January 1, 2006. We elected to adopt SFAS
No. 123R using the modified-prospective method, under
which compensation cost, based on the requirements of
SFAS No. 123R, is recognized beginning with the effective
date for all stock-based awards granted to employees after
the effective date and prior to the effective date that remain
unvested as of the effective date. In addition, under the
traded options on our common stock based on third
party volatility quotes in accordance with the provisions of
Staff Accounting Bulletin, or SAB, No. 107. Our decision
to use implied volatility was based upon the availability
of actively traded options on our common stock and our
assessment that implied volatility is more representative
of future stock price trends than historical volatility. The
expected term of our options is based on historical and
projected employee exercise patterns. We also analyzed
our historical pattern of option exercises based on certain
demographic characteristics and we determined that
there were no meaningful differences in option exercise
activity based on the demographic characteristic. The
approximate risk free interest rate is based on the implied
yield available on U.S. Treasury zero-coupon issues with
remaining terms equivalent to the expected term on our
options. We do not intend to pay dividends on our common
stock in the foreseeable future and, accordingly, we used
a dividend yield of zero in the option pricing model. We
are required to estimate forfeitures at the time of grant
and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. We use historical
data to estimate pre-vesting option forfeitures and record
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stock-based compensation expense only for those awards
Existing valuation models, including the Black-Scholes and
that are expected to vest. All stock-based payment
lattice binomial models, may not provide reliable measures
awards, including those with graded vesting schedules, are
of the fair values of our stock-based compensation.
amortized on a straight-line basis over the requisite service
Consequently, there is a risk that our estimates of the fair
periods of the awards, which are generally the vesting
values of our stock-based compensation awards on the
periods. Beginning in 2006, we began issuing non-vested
grant dates may bear little resemblance to the actual values
stock units and non-vested stock with performance goals
realized upon the exercise, expiration, early termination
to certain senior members of management. The number
or forfeiture of those stock-based payments in the future.
of non-vested stock units or non-vested stock underlying
Certain stock-based payments, such as employee stock
each award may be determined based on a range of
options, may expire with little or no intrinsic value compared
attainment within defined performance goals. We are
to the fair values originally estimated on the grant date
required to estimate the attainment that will be achieved
and reported in our financial statements. Alternatively, the
related to the defined performance goals and number
value realized from these instruments may be significantly
of non-vested stock units or non-vested stock that will
higher than the fair values originally estimated on the grant
ultimately be awarded in order to recognize compensation
date and reported in our financial statements. There is
expense over the vesting period. If our initial estimates
currently no market-based mechanism or other practical
of performance goal attainment change, the related
application to verify the reliability and accuracy of the
expense may fluctuate from quarter to quarter based
estimates stemming from these valuation models, nor is
on those estimates and if the performance goals are not
there a means to compare and adjust the estimates to
met, no compensation cost will be recognized and any
actual values. The guidance in SFAS No. 123R and SAB
previously recognized compensation cost will be reversed.
No. 107 is relatively new from an application perspective
As of December 31, 2006, there was $64.8 million of
and the application of these principles may be subject to
total unrecognized compensation cost related to options,
further interpretation and refinement over time. See Notes
non-vested stock and non-vested stock units. That cost is
3 and 7 to our consolidated financial statements included
expected to be recognized over a weighted-average period
elsewhere in this Annual Report for further information
of 1.92 years.
regarding our adoption of SFAS No. 123R.
If factors change and we employ different assumptions for
For information regarding our Audit Committee’s voluntary,
estimating stock-based compensation expense in future
independent review of our historical stock option granting
periods or if we decide to use a different valuation model,
practices and the related accounting see Note 2 to our
the stock-based compensation expense we recognize in
consolidated financial statements included elsewhere in
future periods may differ significantly from what we have
this Annual Report.
recorded in the current period and could materially affect
our operating income, net income and earnings per share.
This may result in a lack of consistency in future periods
and materially affect the fair value estimate of stock-based
payments. It may also result in a lack of comparability with
other companies that use different models, methods and
assumptions. The Black-Scholes option-pricing model
was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully
transferable. These characteristics are not present in our
option grants and employee stock purchase plan shares.
Core and Product Technology Assets
We review acquired core and product technology assets
for impairment on a periodic basis by comparing the
estimated net realizable value to the unamortized cost of
the technology. We have acquired our core and product
technology assets from our business combinations and
other third party agreements. The recoverability of these
technologies is primarily dependent upon our ability to
commercialize products utilizing these technologies. The
estimated net realizable value of the purchased technology
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
is based on the estimated undiscounted future cash
if events or changes in circumstances indicate that the
flows derived from such technology. Our assumptions
carrying amount could exceed fair value. Fair values are
about future revenues and expenses require significant
based on discounted cash flows using a discount rate
judgment associated with the forecast of the performance
determined by our management to be consistent with
of our products. Actual revenues and costs could vary
industry discount rates and the risks inherent in our current
significantly from these forecasted amounts. As of
business model. In accordance with SFAS No. 142,
December 31, 2006, the estimated undiscounted future
Goodwill and Other Intangible Assets, we completed
cash flows expected from core and product technology
the required annual impairment tests of goodwill as of
assets from these acquisitions is sufficient to recover
December 31, 2006. There were no impairment charges
their carrying value. If these products are not ultimately
recorded as a result of our annual impairment tests. Due
accepted by our customers and distributors, and there
to uncertain market conditions and potential changes in
is no alternative future use for the technology, we could
our strategy, product portfolio or reportable segments,
determine that some or all of their remaining $81.8 million
it is possible that the forecasts we use to support our
carrying value is impaired. In the event of impairment, we
goodwill could change in the future, which could result in
would record an impairment charge to earnings that could
non-cash charges that would adversely affect our results of
have a material adverse effect on our results of operations.
operations and financial condition.
Goodwill
Income Taxes
At December 31, 2006, we had $631.7 million in goodwill
We are required to estimate our income taxes in each of
primarily related to our acquisitions. The goodwill recorded
the jurisdictions in which we operate as part of the process
in relation to these acquisitions is not deductible for
of preparing our consolidated financial statements. At
tax purposes. We operate in a single industry segment
December 31, 2006, we have approximately $94.3 million in
consisting of the design, development and marketing of
current and long-term deferred tax assets. SFAS No. 109,
technology solutions that deliver applications on-demand.
Accounting for Income Taxes, requires a valuation
Our revenues are derived from sales of our Application
allowance to reduce the deferred tax assets reported if,
Delivery Infrastructure products and related technical
based on the weight of the evidence, it is more likely than
services in the Americas, Europe, the Middle East and
not that some portion or all of the deferred tax assets will
Africa, or EMEA, and Asia-Pacific regions and from online
not be realized. We review deferred tax assets periodically
services sold by our Citrix Online Division. These three
for recoverability and make estimates and judgments
geographic regions and the Citrix Online Division constitute
regarding the expected geographic sources of taxable
our reportable segments. See Note 13 to our consolidated
income, gains from investments, as well as tax planning
financial statements included elsewhere in this Annual
strategies in assessing the need for a valuation allowance.
Report for additional information regarding our reportable
At December 31, 2006, we determined that a valuation
segments. We evaluate goodwill along these segments,
allowance of approximately $1.3 million relating to foreign
which represent our reporting units. Substantially all of
tax credit carryovers was necessary to reduce our deferred
our goodwill at December 31, 2006 was associated with
tax assets to the amount that will more likely than not be
our Americas and Online Services reportable segments.
realized. If the estimates and assumptions used in our
Excluding goodwill, we have no intangible assets deemed
determination change in the future, we could be required to
to have indefinite lives.
We use judgment in assessing goodwill for impairment.
Goodwill is reviewed for impairment annually, or sooner
revise our estimates of the valuation allowances against our
deferred tax assets and adjust our provisions for additional
income taxes.
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In the ordinary course of global business, there are
“Management’s Discussion and Analysis of Financial
transactions for which the ultimate tax outcome is
Condition and Results of Operations — Overview” which
uncertain, thus judgment is required in determining the
could impact our future performance and financial position.
worldwide provision for income taxes. We provide for
income taxes on transactions based on our estimate of the
probable liability. We adjust our provision as appropriate for
changes that impact our underlying judgments. Changes
that impact provision estimates include such items as
jurisdictional interpretations on tax filing positions based
on the results of tax audits and general tax authority
rulings. Due to the evolving nature of tax rules combined
with the large number of jurisdictions in which we operate,
it is possible that our estimates of our tax liability and
Results of Operations
Our operations consist of the design, development
and marketing of technology solutions that deliver
applications on-demand with high performance,
enhanced security and improved TCO. We market and
license our products through multiple channels such
as value added resellers, channel distributors, system
integrators, independent software vendors, our Websites
and original equipment manufacturers.
the realizability of our deferred tax assets could change
Our cost of services revenues and operating expenses
in the future, which may result in additional tax liabilities
increased for 2006 when compared to 2005 due to the
and adversely affect our results of operations, financial
recognition of stock-based compensation expense related
condition and cash flows.
The following discussion relating to the individual financial
statement captions, our overall financial performance,
operations and financial position should be read in
conjunction with the factors and events described in
to our adoption of SFAS No. 123R. See “Management’s
Discussion and Analysis of Financial Condition and
Results of Operations — Critical Accounting Policies and
Estimates” and Notes 3 and 7 to our consolidated financial
statements included elsewhere in this Annual Report for
more information related to our adoption of SFAS No. 123R.
Citrix Systems, Inc.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table sets forth our consolidated statements of income data and presentation of that data as a percentage of
change from period-to-period.
(In thousands)
2006
2005(a)
2004(a)
Year Ended December 31,
2006
Compared to
2005
2005
Compared to
2004
Revenues:
Product licenses
License updates
Online services
Technical services
Total net revenues
Cost of revenues:
Cost of product license revenues
Cost of services revenues
Amortization of product related
intangible assets
Total cost of revenues
Gross margin
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other
intangible assets
In-process research and development
(Restated)
(Restated)
$
488,487
405,756
148,795
91,281
$ 409,435
331,102
99,097
69,088
$ 369,826
271,547
44,101
55,683
1,134,319
908,722
741,157
32,911
46,585
19,202
98,698
14,404
26,929
16,766
58,099
3,824
16,705
6,127
26,656
1,035,621
850,623
714,501
155,331
480,343
178,669
108,751
394,153
125,425
86,654
337,777
105,799
16,934
1,000
11,622
7,000
6,204
19,100
Total operating expenses
832,277
646,951
555,534
Income from operations
Interest income
Interest expense
Write-off of deferred debt
issuance costs
Other (expense) income, net
Income before income taxes
Income taxes
203,344
41,210
(927)
203,672
23,614
(2,426)
158,967
14,274
(4,537)
—
(546)
—
(506)
(7,219)
2,851
243,081
60,084
224,354
58,745
164,336
33,049
19.3%
22.5
50.2
32.1
24.8
128.5
73.0
14.5
69.9
21.7
42.8
21.9
42.5
45.7
(85.7)
28.6
(0.2)
74.5
(61.8)
*
7.9
8.3
2.3
Net income
$
182,997
$ 165,609
$ 131,287
10.5
*not meaningful.
(a) See Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
10.7%
21.9
124.7
24.1
22.6
276.7
61.2
173.6
118.0
19.1
25.5
16.7
18.6
87.3
(63.4)
16.5
28.1
65.4
(46.5)
*
(117.7)
36.5
77.8
26.1
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Revenues.
Application Networking products, including the addition of
Net revenues include the following categories: Product
our WANScaler products in 2006, and to a lesser extent,
Licenses, License Updates, Online Services and Technical
the addition of our EdgeSight products in 2006. During
Services. Product Licenses primarily represent fees related
2007, we expect our Application Virtualization Product
to the licensing of our Application Virtualization products,
License revenue to continue to decrease as a percent
which primarily consists of our Access Suite products,
of our total Product License revenue due to expected
including Presentation Server, Access Essentials and
increases in sales of our Application Networking products,
Password Manager; our Application Networking products,
EdgeSight products and our newly acquired Ardence
which are comprised of NetScaler products, SSL Access
products. License Updates consist of fees related to our
Gateway products, Application Firewall products and
Subscription Advantage program that are recognized
WANScaler products; and our other products, which
ratably over the term of the contract, which is typically 12 to
include our EdgeSight, Application Gateway and in 2007
24 months. Subscription Advantage is an annual renewable
our Ardence products. In addition, we offer incentive
program that provides subscribers with automatic delivery
programs to our channel distributors and value-added
of software upgrades, enhancements and maintenance
resellers to stimulate demand for our products. Revenues
releases when and if they become available during the
associated with these programs are partially offset by
term of the subscription. We anticipate that Subscription
these incentives to our channel distributors and value-
Advantage will continue to be of strategic importance to
added resellers. Our Application Virtualization Product
our business throughout 2007 because it fosters long-term
License revenue accounted for approximately 81.0% of our
customer relationships and gives us improved visibility and
Product License revenue for the year ended December 31,
predictability due to the recurring nature of this revenue
2006, 93.2% of our Product License revenue for the year
stream. Online Services revenues consist primarily of fees
ended December 31, 2005 and 99.9% of our Product
related to online service agreements and are recognized
License revenue for the year ended December 31, 2004.
ratably over the contract term. Technical Services revenues
The decrease in our Application Virtualization Product
are comprised of fees from technical support services
License revenue as a percent of our total Product License
which are recognized ratably over the contract term, as well
revenue when comparing the year ended December 31,
as, revenues from product training and certification, and
2006 to the year ended December 31, 2005 is primarily
consulting services revenue related to implementation of
due to the full year impact and increased sales of our
our products, which is recognized as the services
are provided.
(In thousands)
Revenues:
Product licenses
License updates
Online services
Technical services
Year Ended December 31,
2006
2005
2004
2006
Compared to
2005
2005
Compared to
2004
$
488,487 $ 409,435 $ 369,826
405,756 331,102 271,547
44,101
148,795
55,683
91,281
99,097
69,088
$
79,052
74,654
49,698
22,193
$
39,609
59,555
54,996
13,405
Total net revenues
$ 1,134,319 $ 908,722 $ 741,157
$ 225,597
$ 167,565
Citrix Systems, Inc.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Product License revenue increased during 2006 when
Deferred revenues are primarily comprised of License
compared to 2005 primarily due to the full year impact and
Updates revenue from our Subscription Advantage
increased sales of our Application Networking products
product, Online Services revenues from annual service
and, to a lesser extent, increased sales of our Application
agreements for our online services products and Technical
Virtualization products. License Updates revenue increased
Services revenues related to our support services and
during 2006 when compared to 2005 primarily due to
consulting contracts. Deferred revenues increased
a larger base of subscribers and increasing renewals
approximately $70.3 million as of December 31, 2006
related to our Subscription Advantage program. Online
compared to December 31, 2005 is primarily due to
Services revenue increased during 2006 when compared
increased renewals of Subscription Advantage product,
to 2005 primarily due to increased customer adoptions
increased sales of our online service agreements and, to
and renewals of our Online Services products. Technical
a lesser extent, sales of services related to our Application
Services revenue increased during 2006 when compared
Virtualization and Application Networking products. We
to 2005 primarily due to the full year impact and increased
currently expect deferred revenue to continue to increase
sales of support and services related to our Application
in 2007.
Networking products and an increase in sales of services
and support related to the implementation of our
Application Virtualization products. We currently anticipate
that our Application Virtualization Product License revenue
will be flat to slightly down when comparing the first quarter
of 2007 to the fourth quarter of 2006; however, for fiscal
year 2007, we expect Product License revenue to increase
overall primarily due to expected growth from sales of our
Application Networking products, and to a lesser extent,
growth from our Application Virtualization products. We
also anticipate that License Updates revenue will increase
in 2007 due primarily to increased renewals and continued
We do not believe that backlog, as of any particular
date, is a reliable indicator of future performance. While
it is generally our practice to promptly ship our products
upon receipt of properly finalized purchase orders, we
sometimes have product license orders that have not
shipped or have otherwise not met all the required criteria
for revenue recognition. Although the amount of such
product license orders may vary, the amount, if any, of such
product license orders at the end of a particular period has
not been material to total revenue at the end of the
same period.
growth in our installed customer base. Online Services
International Revenues
revenues are also expected to increase in 2007.
International revenues (sales outside the United States)
Product License revenue increased during 2005 when
compared to 2004 primarily due to increased sales of our
Application Networking products which were acquired in
our 2005 and 2004 Acquisitions and increased sales of
our Application Virtualization products. License Updates
revenue increased during 2005 when compared to 2004
primarily due to a larger base of subscribers and increasing
renewals related to our Subscription Advantage program.
Online Services revenue increased during 2005 when
compared to 2004 primarily due to continued acceptance
of our new and existing online services products. Technical
Services revenue increased during 2005 when compared
to 2004 primarily due to increased sales of consulting
services related to implementation of our products and,
to a lesser extent, services related to our Application
Networking products.
accounted for approximately 47.4% of our net revenues
for the year ended December 31, 2006, 50.0% of our
net revenues for the year ended December 31, 2005
and 53.2% for the year ended December 31, 2004. The
decrease in international revenue as a percent of net
revenues for the year ended December 31, 2006 compared
to the year ended December 31, 2005 is primarily due to
increased performance in the United States, increased
sales performance and growth in our online services
products and Application Networking products, which
are currently primarily comprised of domestic revenues.
For detailed information on international revenues, please
refer to Note 13 to our consolidated financial statements
included elsewhere in this Annual Report.
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Segment Revenues
An analysis of our reportable segment net revenue is presented below:
Year Ended December 31,
2006
2005
2004
Revenue
Growth
2005 to 2006
Revenue
Growth
2004 to 2005
(In thousands)
Americas(1)
EMEA(2)
Asia-Pacific
Citrix Online Division
$
499,278 $ 397,233 $ 335,436
391,650 334,900 293,690
67,930
44,101
94,596
148,795
77,492
99,097
Consolidated net revenues
$ 1,134,319 $ 908,722 $ 741,157
(1) Our Americas segment is comprised of the United States, Canada and Latin America.
(2) Defined as Europe, Middle East and Africa.
25.7%
16.9
22.1
50.2
24.8
18.4%
14.0
14.1
124.7
22.6
With respect to our segment revenues, the increase in
our segment revenues, please refer to Note 13 of our
net revenues for the comparative periods presented was
consolidated financial statements included elsewhere in
due primarily to the factors previously discussed across
this Annual Report.
our reportable segments. For additional information on
Cost of Revenues
(In thousands)
Cost of product license revenues
Cost of services revenues
Amortization of product related intangible assets
Year Ended December 31,
2006
2005 (a)
2004 (a)
(Restated)
(Restated)
2006
Compared to
2005
2005
Compared to
2004
$ 32,911 $ 14,404 $
46,585
19,202
26,929 16,705
6,127
16,766
3,824 $ 18,507
19,656
2,436
$ 10,580
10,224
10,639
$ 31,443
Total cost of revenues
$ 98,698 $ 58,099 $ 26,656 $ 40,599
(a) See Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
Cost of product license revenues consists primarily of
revenues increased during 2006 compared to 2005
hardware, product media and duplication, manuals,
primarily due to an increase in support and increased
packaging materials, shipping expense, server capacity
sales of our educational and consulting services related
costs and royalties. Cost of services revenue consists
to our Application Virtualization products, increases in
primarily of compensation and other personnel-related
sales of our online services products, the full year impact
costs of providing technical support, consulting, as well
and increased sales of support and educational services
as the costs related to our online services. Also included
related to our Application Networking products and the
in cost of revenues is amortization of product related
impact of stock-based compensation expenses related to
intangible assets. Cost of product licenses revenues
our adoption of SFAS No 123R. Amortization of product
increased during 2006 when compared to 2005 primarily
related intangible assets increased during 2006 as
due to increased sales and the full year impact of the
compared to 2005 primarily due to amortization of product
acquisition of our Application Networking products
related intangible assets acquired in acquisitions. For more
which contain hardware components that have a higher
information regarding our acquisitions, see “Management’s
cost than our other software products. Cost of services
Discussion and Analysis of Financial Condition and Results
Citrix Systems, Inc.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
of Operations — Overview” and Note 4 to our consolidated
to a lesser extent, due to increased sales of consulting
financial statements included elsewhere in this Annual
and technical support services related to our Application
Report. We anticipate that in 2007, cost of product license
Virtualization products and sales of services related to
revenues will continue to increase as compared to current
our Application Networking products. Amortization of
levels as we currently expect sales of our Application
product related intangible assets increased during 2005 as
Networking products, which have a hardware component,
compared to 2004 primarily due to amortization related to
to increase. In addition, in 2007, we expect our cost of
core and product technology acquired in acquisitions. The
services revenues to increase due to increased sales of
increase in amortization of product related intangible assets
our online services products and an increase in technical
was partially offset by other core and product technology
support costs and increased sales of services as we grow
assets becoming fully amortized during the year.
our customer base, have more frequent product releases
and more complex products.
Gross Margin
Gross margin as a percent of revenue was 91.3% for
Cost of product licenses revenues increased during
2006, 93.6% for 2005 and 96.4% for 2004. The decrease
2005 as compared to 2004 due primarily to sales of our
in gross margin as a percentage of net revenue for all
Application Networking products, which contain hardware
periods presented was primarily due to the increase
components that have a higher cost than our other
in cost of revenues as discussed above. We currently
software products. Cost of services revenues increased
expect that our gross margin will continue to trend
during 2005 compared to 2004 primarily due to increased
slightly downwards in 2007 due to the factors discussed
sales in our Online Services products due to continued
above under Cost of Revenues.
acceptance of our new and existing online products and,
Research and Development Expenses
(In thousands)
Year Ended December 31,
2006
2005(a)
2004(a)
(Restated)
(Restated)
2006
Compared to
2005
2005
Compared to
2004
Research and development
$ 155,331
$ 108,751
$ 86,654
$ 46,580
$ 22,097
(a) See Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
Research and development expenses consisted primarily
and development expenses to increase in 2007 due to
of personnel-related costs. We expensed substantially
the acquisition of Ardence in January 2007 and continued
all development costs included in the research and
investments in our business including the hiring of
development of our products and new functionality
personnel. For more information regarding our acquisitions
added to our existing products as incurred except for
see, “Management’s Discussion and Analysis of Financial
certain core technologies with alternative future uses.
Condition and Results of Operations — Overview” and
Research and development expenses increased during
Notes 4 and 18 to our consolidated financial statements
2006 as compared to 2005 primarily due to an increase
included elsewhere in this Annual Report.
in staffing and related personnel costs due to the full year
impact of our 2005 Acquisitions, our 2006 Acquisitions,
continued investments in our business including the hiring
of personnel, and additional compensation expense
related to the adoption of SFAS No. 123R. Excluding the
effects of any pending acquisitions, we expect research
Research and development expenses increased during
2005 compared to 2004 primarily due to an increase in
staffing and related personnel costs due to the Net6 and
the 2005 Acquisitions, and to a lesser extent, increased
staffing and personnel costs related to our Application
Virtualization products.
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Sales, Marketing and Support Expenses
(In thousands)
Year Ended December 31,
2006
2005(a)
2004(a)
(Restated)
(Restated)
2006
Compared to
2005
2005
Compared to
2004
Sales, marketing and support
$ 480,343 $ 394,153
$ 337,777
$ 86,190
$ 56,376
(a) See Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
Sales, marketing and support expenses consisted primarily
2007, the full period impact of our 2006 Acquisitions and
of personnel-related costs, including sales commissions,
increased compensation costs as we continue to make
and the costs of marketing programs aimed at increasing
investments in our business and hire personnel. For more
revenue, such as advertising, trade shows, public relations
information regarding our acquisitions see, “Management’s
and other market development programs. Sales, marketing
Discussion and Analysis of Financial Condition and Results
and support expenses increased during 2006 compared
of Operations — Overview” and Notes 4 and 18 to our
to 2005 primarily due to an increase in headcount and
consolidated financial statements included elsewhere in
the associated increase in salaries, commissions and
this Annual Report.
other variable compensation and employee related
expenses, the full year impact of our 2005 Acquisitions
and the impact of our 2006 Acquisitions, additional
compensation costs related to our adoption of SFAS
No. 123R and an increase in marketing program costs
related to our worldwide advertising campaigns. During
2006, we increased our utilization of personnel for revenue
generating activities during 2006 as compared to 2005,
which is reflected as cost of service revenues rather than
sales, marketing and support expenses. Excluding the
effects of any pending acquisitions, in 2007, we expect
sales, marketing and support expenses to increase
moderately due to the acquisition of Ardence in January
Sales, marketing and support expenses increased during
2005 compared to 2004 primarily due to an increase
in headcount and the associated increase in salaries,
commissions and other variable compensation and
employee related expenses, as well as an increase in
staffing and related personnel costs due to the 2005
Acquisitions and, to a lesser extent, the full year impact
of our 2004 Acquisitions. Additionally, we increased our
utilization of personnel for revenue generating activities
for the year ended December 31, 2005 as compared to
the year ended December 31, 2004, which is reflected as
cost of service revenues rather than sales, marketing and
support expenses.
General and Administrative Expenses
(In thousands)
2006
2005(a)
2004(a)
(Restated)
(Restated)
Year Ended December 31,
2006
Compared to
2005
2005
Compared to
2004
General and administrative
$ 178,669
$ 125,425
$ 105,799
$ 53,244
$ 19,626
(a) See Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
Citrix Systems, Inc.
2006 Annual Report
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
General and administrative expenses consisted primarily
Ardence in January 2007 and continued investments to
of personnel-related related costs and expenses related to
support our future growth. For more information regarding
outside consultants assisting with regulatory compliance
our acquisitions see, “Management’s Discussion and
and information systems, as well as, auditing and legal
Analysis of Financial Condition and Results of Operations
fees. General and administrative expenses increased
— Overview” and Notes 4 and 18 to our consolidated
during 2006 compared to 2005 primarily due to increases
financial statements included elsewhere in this Annual
in auditing, consulting and legal fees primarily related to
Report and for more information regarding the investigation
the investigation of our historical stock option granting
of our historical stock option granting practices and the
practices and the associated restatements of our prior
associated restatements of our prior financial statements,
consolidated financial statements, as well as additional
see Note 2 to our consolidated financial statements
compensation costs related to the adoption of SFAS
included elsewhere in this Annual Report on Form 10-K for
No. 123R, an increase in headcount and the associated
the year ended December 31, 2006.
salaries and employee related expenses, and the full year
impact of our 2005 Acquisitions and, to a lesser extent,
the impact of our 2006 Acquisitions. Excluding the effects
of any pending acquisitions, we expect general and
administrative expenses to increase in 2007 due to costs
related to the investigation of our historical stock option
granting practices and the associated restatements of our
prior consolidated financial statements, the acquisition of
General and administrative expenses increased for the
year ended December 31, 2005 compared to the year
ended December 31, 2004, primarily due to an increase
in headcount, associated salaries and employee related
expenses, an increase in staffing and employee related
expenses due to the 2005 Acquisitions and, to a lesser
extent, the full year impact of our 2004 Acquisitions.
Amortization of Other Intangible Assets
(In thousands)
2006
2005
2004
Year Ended December31,
2006
Compared to
2005
2005
Compared to
2004
Amortization of the other intangible assets
$ 16,934
$ 11,622
$ 6,204
$ 5,312
$ 5,418
Amortization of other intangible assets increased during
estimable useful lives in the net amount of $40.0 million.
2006 as compared to 2005 due to an increase in
We currently expect amortization expense to increase
amortization expense related to certain finite intangible
during 2007 as a result of our acquisitions. For more
assets acquired in our acquisitions. Amortization of other
information regarding our acquisitions see, “Management’s
intangible assets increased during 2005 as compared
Discussion and Analysis of Financial Condition and Results
to 2004 primarily due to an increase in certain acquired
of Operations — Overview” and Notes 4 and 18 to our
finite-lived intangible assets. As of December 31, 2006,
consolidated financial statements included elsewhere in
we had unamortized other identified intangible assets with
this Annual Report.
In-Process Research and Development
(In thousands)
2006
2005
2004
Year Ended December31,
2006
Compared to
2005
2005
Compared to
2004
In-process research and development
$ 1,000
$ 7,000
$ 19,100
$ (6,000)
$ (12,100)
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In 2006, $1.0 million of the purchase price paid for our
develop new products or services utilizing the acquired
2006 Acquisitions was allocated to IPR&D, in 2005, $7.0
in-process technology, but there can be no assurance that
million of the purchase price paid for our 2005 Acquisitions
commercial viability of future product or service offerings
was allocated to IPR&D, and in 2004, $19.1 million of
will be achieved. Furthermore, future developments in the
the purchase price paid for our 2004 Acquisitions was
software industry, changes in technology, changes in other
allocated to IPR&D. The amounts allocated to IPR&D
products and offerings or other developments may cause
in our acquisitions had not yet reached technological
us to alter or abandon product plans. Failure to complete
feasibility, had no alternative future use and were written-
the development of projects in their entirety, or in a timely
off at the date of the acquisitions in accordance with FASB
manner, could have a material adverse impact on our
Interpretation No. 4, Applicability of FASB Statement No. 2
financial condition and results of operations.
to Business Combinations Accounted for by the Purchase
Method . For more information regarding the acquisitions,
see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Overview” and
Note 4 to our consolidated financial statements.
The fair value assigned to IPR&D was based on valuations
prepared using methodologies and valuation techniques
consistent with those used by independent appraisers. All
fair values were determined using the income approach,
which includes estimating the revenue and expenses
Our efforts with respect to the acquired technologies
associated with a project’s sales cycle and by estimating
currently consist of design and development that may
the amount of after-tax cash flows attributable to the
be required to support the release of the technologies
projects. The future cash flows were discounted to present
into updated versions of existing service offerings and
value utilizing an appropriate risk-adjusted rate of return,
potentially new product and service offerings related to
which ranged from 17% to 25%. The rate of return included
our NetScaler, Access Gateway and our Online Services
a factor that takes into account the uncertainty surrounding
products. We currently expect that we will successfully
the successful development of the IPR&D.
Interest Income
(In thousands)
Interest Income
Year Ended December31,
2006
2005
2004
2006
Compared to
2005
2005
Compared to
2004
$ 41,210
$ 23,614
$ 14,274
$ 17,596
$ 9,340
Interest income increased during 2006 as compared
earned on overall higher average cash, cash equivalent and
to 2005 due to higher interest rates earned on overall
investment balances that resulted primarily from cash from
higher average cash, cash equivalent and investment
operations, increased proceeds received from employee
balances that resulted primarily from increased proceeds
stock-based compensation plans, partially offset by
received from employee stock-based compensation
increased spending on stock repurchases and acquisitions.
plans, a decrease in cash spent for acquisitions and
For more information see “Management’s Discussion and
an increase in cash from operations, partially offset by
Analysis of Financial Condition and Results of Operations
increased spending on stock repurchases, an increase
— Overview” and “— Liquidity and Capital Resources” and
in net payments made on our debt and an increase in
Note 4 to our consolidated financial statements included
capital expenditures. Interest income increased during
elsewhere in this Annual Report.
2005 as compared to 2004 due to higher interest rates
Citrix Systems, Inc.
2006 Annual Report
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Interest Expense
(In thousands)
Year Ended December 31,
2006
2005(a)
2004(a)
(Restated)
(Restated)
2006
Compared to
2005
2005
Compared to
2004
Interest Expense
$ 927
$ 2,426
$ 4,537
$ (1,499)
$ (2,111)
(a) See Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
Interest expense decreased during 2006 compared to
in 2005 related to amounts drawn during the year on our
2005 primarily due to the repayment of our term loan
senior revolving credit facility, or the Credit Facility, and
facility, or the Term Loan, in February 2006. Interest
the Term Loan. For more information see “Management’s
expense decreased during 2005 as compared to 2004
Discussion and Analysis of Financial Condition and Results
primarily due to the redemption of our convertible
of Operations — Liquidity and Capital Resources” and
subordinated debentures on March 22, 2004. This
Note 9 to our consolidated financial statements included
decrease was partially offset by interest expense incurred
elsewhere in this Annual Report.
Write-off of Deferred Debt Issuance Costs
Year Ended December 31,
(In thousands)
Write-off of deferred debt issuance costs
2006
$ —
2005
$ —
2004
$ 7,219
$ —
$ (7,219)
2006
Compared to
2005
2005
Compared to
2004
In 2004, we incurred a charge of approximately $7.2 million
debentures see “Management’s Discussion and Analysis of
for our remaining prepaid issuance costs as a result of the
Financial Condition and Results of Operations — Liquidity”
redemption of our convertible subordinated debentures.
and Note 9 to our consolidated financial statements
For more information on our convertible subordinated
included elsewhere in this Annual Report.
Other (Expense) Income, Net
(In thousands)
Year Ended December 31,
2006
2005(a)
2004(a)
(Restated)
(Restated)
2006
Compared to
2005
2005
Compared to
2004
Other (expense) income, net
$ (546)
$ (506)
$2,851
$ (40)
$ (3,357)
(a) See Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
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Other (expense) income, net is primarily comprised of
reduction of approximately $14.2 million in tax reserves
remeasurement and foreign currency transaction gains
related to the conclusion of an Internal Revenue Service
(losses), other-than-temporary declines in the value of our
examination for the 2001 tax year and the expiration
equity investments and debt instruments and realized gains
of a statute of limitations for the 2002 tax year partially
(losses) on the sale of available-for-sale investments. Other
offset by an additional tax reserve of approximately $13.0
(expense) income remained relatively flat when comparing
million related to uncertainties arising in the third quarter
2006 to 2005. The decrease in other (expense) income,
of 2006. The net effect of these contingencies, primarily
net during 2005 as compared to 2004 was due primarily
relating to the taxability of transactions between entities
to losses on the remeasurement of our foreign currency
of the consolidated company, did not have a material
transactions partially offset by realized gains on the sale of
impact on our effective tax rate for the year ended
certain of our investments.
December 31, 2006.
Income Taxes
In 2006, our effective tax rate decreased to approximately
On October 22, 2004, the American Jobs Creation Act,
24.7% from 26.2% primarily due to the tax impact of the
or the AJCA, was signed into law. The AJCA provided
dividend repatriated under the AJCA in 2005 partially
for an 85% dividends received deduction on dividend
offset by the tax effects of our adoption of SFAS No. 123R.
distributions of foreign earnings to a U.S. taxpayer, if certain
In 2005, our effective tax rate increased to 26.2% from
conditions are met. During the second quarter of fiscal
20.1% in 2004, primarily due to the tax impact of the
2005, we completed our evaluation of the effects of the
dividend repatriated under the AJCA. Our effective tax
repatriation provision of the AJCA and our Chief Executive
rate may fluctuate throughout 2007 based on a number
Officer and Board of Directors approved our dividend
of factors including variations in estimated taxable income
reinvestment plan, or DRP, under the AJCA. During 2005,
in our geographic locations, completed and potential
we repatriated approximately $503.0 million of certain
foreign earnings, of which $500.0 million qualified for
acquisitions, our adoption of FASB Interpretation, or FIN,
No. 48, Accounting for Uncertainty in Income Taxes – an
the 85% dividends received deduction. During 2005, we
interpretation of FASB Statement No. 109, the effects of
recorded an estimated tax provision of approximately $24.4
SFAS No. 123R and changes in statutory tax rates,
million related to the repatriation. Additionally, during 2005,
among others.
we recorded the reversal of approximately $8.8 million
for income taxes on certain foreign earnings for which a
deferred tax liability had been previously recorded.
Liquidity and Capital Resources
During 2006, we generated positive operating cash flows
of $328.7 million. These cash flows related primarily to
We maintain certain operational and administrative
net income of $183.0 million, adjusted for, among other
processes in overseas subsidiaries and its foreign earnings
things, non-cash charges, including depreciation and
are taxed at lower foreign tax rates. Other than the one-
amortization of $63.6 million, stock-based compensation
time repatriation provision under the AJCA described
expense of $61.6 million and the tax effect on stock-based
above, we do not expect to remit earnings from our
compensation of $40.6 million. These cash inflows are
foreign subsidiaries.
partially offset by an operating cash outflow of $51.9 million
We establish tax reserves when, despite our belief that
our tax return positions are fully supportable, certain
of these positions may be challenged. While it is often
difficult to predict whether we will prevail, we believe
that our tax reserves reflect the probable outcome of
known contingencies. As such, included in our effective
tax rate for the year ended December 31, 2006 is the
related to the excess tax benefit due to the exercise of
stock-based awards and a deferred income tax benefit
of $4.4 million. Also attributed to these cash inflows is
an aggregate increase in cash flow from our operating
assets and liabilities of $24.6 million, net of the effects of
acquisitions. Our investing activities used $437.3 million
of cash consisting primarily of the net purchases after
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
reinvestment, from sales and maturities of our available-
primarily of the net proceeds, after reinvestment, from
for-sale investments of $323.7 million. These cash outflows
sales and maturities of our available-for-sale investments
also consisted of cash paid for the 2006 Acquisitions, net
of $355.0 million. These cash inflows are partially offset by
of cash acquired, of $61.5 million and the expenditure of
cash paid for the 2005 Acquisitions, net of cash acquired,
$52.1 million for the purchase of property and equipment.
of $168.3 million and the expenditure of $26.4 million for
Our financing activities used cash of $26.4 million primarily
the purchase of property and equipment. Our financing
related to $274.2 million of cash paid under our stock
activities used cash of $42.9 million related to $174.4
repurchase programs and $34.9 million paid on our debt.
million of cash paid under our stock repurchase programs
These cash outflows are partially offset by $230.7 million
partially offset by $101.6 million in proceeds received from
in proceeds received from employee stock compensation
employee stock compensation plans and $29.9 million in
plans and $51.9 million related to excess tax benefits from
net proceeds from our Credit Facility and Term Loan, net of
the exercise of stock-based awards.
financing fees.
During 2005, we generated positive operating cash flows
Historically, significant portions of our cash inflows were
of $293.1 million. These cash flows related primarily to net
generated by our operations. We currently expect this trend
income of $165.6 million, adjusted for, among other things,
to continue throughout 2007. We believe that our existing
tax effect of stock-based compensation of $35.0 million,
cash and investments together with cash flows expected
depreciation and amortization of $50.4 million, stock-based
from operations will be sufficient to meet expected
compensation expense of $7.4 million, the write-off of
operating and capital expenditure requirements for the next
in-process research and development associated with the
12 months. We continue to search for suitable acquisition
2005 Acquisitions of $7.0 million and provision for product
candidates and could acquire or make investments
returns of $6.0 million. Also attributed to these cash inflows
in companies we believe are related to our strategic
is an aggregate increase in cash flow from our operating
objectives. We could from time to time seek to raise
assets and liabilities of $35.9 million partially offset by a
additional funds through the issuance of debt or equity
deferred income tax benefit of $14.8 million. Our investing
securities for larger acquisitions.
activities provided $160.3 million of cash consisting
Cash and Investments
(In thousands)
Cash and investments
Year Ended December 31,
2006
2005
2006
Compared to
2005
$ 743,381 $ 554,221
$ 189,160
The increase in cash and investments at December 31,
highly liquid securities to allow for flexibility in the event
2006 as compared to December 31, 2005, is primarily
of immediate cash needs. Our short-term and long-term
due to increased proceeds received from employee
investments primarily consist of interest-bearing securities.
stock-based compensation plans, a decrease in cash
See “Management’s Discussion and Analysis of Financial
spent for acquisitions and an increase in cash provided by
Condition and Results of Operations — Liquidity and
operations, partially offset by increased spending on stock
Capital Resources” and Note 5 to our consolidated financial
repurchases, an increase in net payments made on our
statements included elsewhere in this Annual Report for
debt and an increase in capital expenditures. We generally
further information.
invest our cash and cash equivalents in investment grade,
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Restricted Cash Equivalents and Investments
(In thousands)
Year Ended December 31,
2006
2005
2006
Compared to
2005
Restricted cash equivalents and investments
$ 63,815
$ 63,728
$ 87
Restricted cash equivalents and investments as of
limits and to withdraw and use excess investment earnings
December 31, 2006 and 2005 are primarily comprised
from the pledged collateral for operating purposes. For
of approximately $62.8 million in investment securities
further information regarding our synthetic lease, see
and cash equivalents pledged as collateral for specified
Note 11 to our consolidated financial statements included
obligations under our synthetic lease arrangement. We
elsewhere in this Annual Report.
maintain the ability to manage the composition of the
restricted cash equivalents and investments within certain
Accounts Receivable, Net
(In thousands)
Accounts receivable
Allowance for returns
Allowance for doubtful accounts
Accounts receivable, net
Year Ended December 31,
2006
2005
2006
Compared to
2005
$ 209,011
(1,667)
(2,370)
$ 146,397
(2,332)
(2,050)
$ 62,614
665
(320)
$ 204,974
$ 142,015
$ 62,959
The increase in accounts receivable at December 31,
balances from our distributors or customers, which are
2006 compared to December 31, 2005 was primarily due
comprised of large business enterprises, governments
to an increase in sales, particularly in the last month of
and small and medium-sized businesses. If the financial
2006 compared to the last month of 2005. Our allowance
condition of our distributors or customers deteriorates,
for returns decreased during 2006 as compared to 2005.
our operating results could be adversely affected. At
The activity in our allowance for returns was comprised
December 31, 2006 and 2005, no distributor or customer
of $5.3 million in credits issued for stock balancing rights
accounted for more than 10% of our accounts receivable.
during 2006 partially offset by $4.6 million of provisions for
For more information regarding significant customers see
returns recorded during 2006. Our allowance for doubtful
Note 13 to our consolidated financial statements included
accounts remained relatively flat when comparing 2006 to
elsewhere in this Annual Report.
2005. The activity in our allowance for doubtful accounts
was comprised of an additional $2.0 million of provisions
for doubtful accounts recorded during the year and $0.1
million of provisions for doubtful accounts associated with
accounts receivable acquired in our 2006 Acquisitions
partially offset by $1.7 million of uncollectible accounts
written off, net of recoveries. From time to time, we could
maintain individually significant accounts receivable
Credit Facility and Term Loan
Effective on August 9, 2005, we entered into the Credit
Facility with a group of financial institutions, or the
Lenders. Effective September 27, 2006, we entered into
an amendment and restatement of the Credit Facility, or
the Amendment. The Amendment decreased the overall
range of interest we will pay on amounts outstanding on
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
the Credit Facility and lowered the facility fee. In addition,
Effective on August 9, 2005, we entered into the Term Loan
the Amendment extended the term of the Credit Facility.
with the Lenders. The Term Loan provided for an eighteen-
The Credit Facility, as amended, allows us to increase the
month single-draw term loan facility in the aggregate
revolving credit commitment up to a maximum aggregate
amount of $100.0 million. The Term Loan’s interest rate
revolving credit commitment of $175.0 million. The Credit
was LIBOR plus 0.5% and adjusted in the range of 0.5%
Facility, as amended, currently provides for a revolving
to 1.25% above LIBOR based on the level of our total debt
line of credit that will expire on September 27, 2011 in the
and adjusted EBITDA. In addition, we were required to pay
aggregate amount of $100.0 million, subject to continued
an annual facility fee ranging from 0.125% to 0.25% based
covenant compliance. A portion of the revolving line of
on the aggregate amount of the Term Loan and the level of
credit (i) in the aggregate amount of $25.0 million may be
our total debt and adjusted EBITDA. We used the proceeds
available for issuances of letters of credit and (ii) in the
from the Term Loan to partially fund the repatriation of
aggregate amount of $15.0 million may be available for
certain of our foreign earnings in connection with the
swing line loans. The Credit Facility, as amended, currently
AJCA. For more information related to our long-term debt
bears interest at the London Interbank Offered Rate, or
and the AJCA, see Notes 9 and 12 of our consolidated
LIBOR, plus 0.32% and adjusts in the future in the range
financial statements included elsewhere in this Annual
of 0.32% to 0.80% above LIBOR based on the level of our
Report and “Management’s Discussion and Analysis of
total debt and our adjusted earnings before interest, taxes,
Financial Condition and Results of Operations – Results
depreciation and amortization, or EBITDA. In addition,
of Operations.” In February 2006, we repaid the remaining
we are required to pay an annual facility fee ranging from
$31.0 million outstanding under the Term Loan in full.
0.08% to 0.20% based on the aggregate amount available
under the Credit Facility, as amended, and the level of our
total debt and adjusted EBITDA. During the year ended
December 31, 2006, no funds were borrowed under the
Credit Facility, as amended, and as of December 31, 2006
there were no amounts outstanding under the Credit
Facility, as amended.
Our credit facility agreement contains a number of
Stock Repurchase Program
Our Board of Directors has authorized an ongoing stock
repurchase program with a total repurchase authority
granted to us of $1.5 billion, of which $200 million was
authorized in February 2006 and $300 million was
authorized in October 2006. We may use the approved
dollar authority to repurchase stock at any time until the
approved amounts are exhausted. The objective of our
affirmative and negative covenants. Because of delays in
stock repurchase program is to improve stockholders’
filing our Annual Report on Form 10-K for the year ended
return. At December 31, 2006, approximately $293.4 million
December 31, 2006, our Quarterly Report on Form 10-Q
was available to repurchase shares of our common stock
for the three months ended March 31, 2007 and our
pursuant to the stock repurchase program. All shares
Quarterly Report on Form 10-Q for the three months
repurchased are recorded as treasury stock.
ended June 30, 2007, we were at risk of breaching the
affirmative covenant requiring certain financial statements
to be provided to our Lenders within 90 days after the
end of our fiscal year and 45 days after the end of our
fiscal quarters. We received waivers related to these
covenant breaches to extend the due date of such financial
statements until September 30, 2007. We have notified our
Lenders that we will provide such financial statements by
the extension date.
We are authorized to make open market purchases of our
common stock using general corporate funds. Additionally,
during 2006 and 2005, we entered into structured stock
repurchase arrangements with large financial institutions
using general corporate funds as part of our stock
repurchase program in order to lower the average cost
to acquire shares. These programs include terms that
require us to make up-front payments to the counterparty
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financial institution and result in the receipt of stock during
proceeds from employee stock option exercises and the
and/or at the end of the agreement or depending on
related tax benefit.
market conditions, the receipt of either stock or cash at the
maturity of the agreement.
We suspended our stock repurchase program for the
duration of our Audit Committee’s voluntary, independent
We made prepayments to financial institutions, net of
review of our historical stock option granting practices
premiums received of approximately $114.4 million in 2006
and related accounting. For more information on our
and $52.2 million in 2005, under our structured stock
independent review of historical stock option granting
repurchase arrangements. We expended approximately
practices and related accounting see Note 2 to our
$159.8 million in 2006 and $122.2 million in 2005 for open
consolidated financial statements included elsewhere in
market purchases. Under our structured stock repurchase
this Annual Report.
agreements we took delivery of 4,307,112 shares at
an average price of $30.76 per share in 2006 and we
took delivery of 2,302,217 shares at an average price of
$22.02 per share in 2005. As of December 31, 2006, we
have prepaid notional amounts of approximately $36.3
million remaining under our structured stock repurchase
programs, which expire in January 2007. Due to the fact
that the total shares to be received under our structured
repurchase arrangements at December 31, 2006 is not
determinable until the contracts mature, the above price
per share amounts exclude the remaining shares to be
received subject to the agreements. We repurchased
5,193,410 shares of outstanding common stock with an
average price of $30.77 during 2006 and we repurchased
5,054,400 shares of outstanding common stock with an
Contractual Obligations and Off-Balance
Sheet Arrangement
Contractual Obligations
We have certain contractual obligations that are recorded
as liabilities in our consolidated financial statements.
Other items, such as operating lease obligations, are
not recognized as liabilities in our consolidated financial
statements, but are required to be disclosed in the notes to
our consolidated financial statements.
The following table summarizes our significant contractual
obligations at December 31, 2006 and the future periods
in which such obligations are expected to be settled
in cash. Additional details regarding these obligations
are provided in the notes to our consolidated financial
average price of $24.18 during 2005 in our open market
statements (in thousands):
purchase transactions. In addition, a significant portion
of the funds used to repurchase stock was funded by
Operating lease obligations
Synthetic lease obligations
Purchase obligations (1)
Payments due by period
Total
$ 122,588
8,214
9,322
Less than
1 Year
$ 23,523
3,557
9,322
1-3 Years
4-5 Years
$ 35,680
4,657
—
$ 23,636
—
—
More than
5 Years
$ 39,749
—
—
Total contractual obligations (2)
$ 140,124
$ 36,402
$ 40,337
$ 23,636
$ 39,749
(1) Purchase obligations represent non-cancelable commitments to purchase inventory ordered before year-end.
(2) Total contractual obligations do not include agreements where our commitment is variable in nature or where cancellations without
payment provisions exist.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
As of December 31, 2006, we did not have any individually
basis, we evaluate the property for indications of
material capital lease obligations, purchase obligations,
permanent impairment. If an evaluation were to indicate
or other material long-term commitments reflected on our
that the fair value of the property were to decline below
consolidated balance sheets.
Off-Balance Sheet Arrangement
During 2002, we became a party to a synthetic lease
arrangement totaling approximately $61.0 million for our
$51.9 million, we would be responsible for the difference
under our residual value guarantee, which could have a
material adverse effect on our results of operations and
financial condition.
corporate headquarters office space in Fort Lauderdale,
The synthetic lease includes certain financial covenants
Florida. The synthetic lease represents a form of off-
including a requirement for us to maintain a restricted cash,
balance sheet financing under which an unrelated third
cash equivalent or investment balance of approximately
party lessor funded 100% of the costs of acquiring the
$62.8 million as collateral, which is classified as restricted
property and leases the asset to us. The synthetic lease
cash equivalents and investments in our accompanying
qualifies as an operating lease for accounting purposes
consolidated balance sheets. We maintain the ability to
and as a financing lease for tax purposes. We do not
manage the composition of restricted investments within
include the property or the lease debt as an asset or a
certain limits and to withdraw and use excess investment
liability on our accompanying consolidated balance sheets.
earnings from the pledged collateral for operating
Consequently, payments made pursuant to the lease
purposes. Additionally, we must maintain a minimum net
are recorded as operating expenses in our consolidated
cash and investment balance of $100.0 million, excluding
statements of income. We entered into the synthetic
our collateralized investments, equity investments and
lease in order to lease our headquarters properties under
outstanding debt as of the end of each fiscal quarter. As
more favorable terms than under our previous lease
of December 31, 2006, we had approximately $642.5
arrangements. We do not materially rely on off-balance
million in cash and investments in excess of this required
sheet arrangements for our liquidity or as capital resources.
level. The synthetic lease includes non-financial covenants,
For information regarding cash outflows associated with
including the maintenance of the property and adequate
our lease payments see “— Contractual Obligations.”
insurance, prompt delivery of financial statements to the
The initial term of the synthetic lease is seven years. Upon
approval by the lessor, we can renew the lease twice for
additional two-year periods. The lease payments vary
based on LIBOR, plus a margin. At any time during the
administrative agent of the lessor and prompt payment of
taxes associated with the property. As of December 31,
2006, we were in compliance with all material provisions of
the arrangement.
lease term, we have the option to sublease the property
Our synthetic lease contains a number of affirmative and
and upon thirty days’ written notice, we have the option
negative covenants. Because of delays in filing our Annual
to purchase the property for an amount representing the
Report on Form 10-K for the year ended December 31,
original property cost and transaction fees of approximately
2006, our Quarterly Report on Form 10-Q for the three
$61.0 million plus any lease breakage costs and
months ended March 31, 2007 and our Quarterly Report
outstanding amounts owed. Upon at least 180 days notice
on Form 10-Q for the three months ended June 30, 2007,
prior to the termination of the initial lease term, we have the
we were at risk of breaching the affirmative covenants
option to remarket the property for sale to a third party. If
requiring our Annual Report on Form 10-K to be provided
we choose not to purchase the property at the end of the
to the lessor within 100 days after the end of our fiscal
lease term, we have guaranteed a residual value to the
year and our Quarterly Reports on Form 10-Q within 55
lessor of approximately $51.9 million and possession of the
days after the end of our fiscal quarters, respectively. We
buildings will be returned to the lessor. On a periodic
received waivers related to these anticipated covenant
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breaches to extend the due date of our Annual Report on
During 2002 and 2001, we took actions to consolidate
Form 10-K for the year ended December 31, 2006 and
certain of our offices, including the exit of certain leased
our Quarterly Report on Form 10-Q for the three months
office space and the abandonment of certain leasehold
ended March 31, 2007 and our Quarterly Report on Form
improvements. During the third quarter of 2006, we
10-Q for the three months ended June 30, 2007 until
entered into an agreement, which assigned the operating
October 31, 2007. We provided such reports to the lessor
lease and all remaining liability related to one of the closed
on September 14, 2007.
In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities, which addresses
the consolidation of variable interest entities in which an
enterprise absorbs a majority of the entity’s expected
losses, receives a majority of the entity’s expected residual
returns, or both, as a result of ownership, contractual or
other financial interests in the entity. In December 2003,
the FASB issued FIN No. 46 (revised), which replaced FIN
No. 46. FIN No. 46 (revised) was effective immediately
for certain disclosure requirements and variable interest
entities referred to as special-purpose entities for periods
ending after December 15, 2003 and for other types of
offices to a third party. Lease obligations related to the
remaining existing operating lease continue to 2018
with a total remaining obligation at December 31, 2006
of approximately $8.9 million, of which $1.6 million was
accrued as of December 31, 2006, and is reflected in
accrued expenses and other liabilities in our consolidated
financial statements. In calculating this accrual, we made
estimates, based on market information, including the
estimated vacancy periods and sublease rates and
opportunities. We periodically re-evaluate our estimates;
and if actual circumstances prove to be materially worse
than management has estimated, the total charges for
these vacant facilities could be significantly higher.
entities for financial statements for periods ending after
Because virtually all holders of stock options granted by
March 15, 2004. We determined that we are not required
us were not involved in or aware of the incorrect pricing of
to consolidate the lessor, the leased facility or the related
certain options, we have taken and intend to take further
debt associated with our synthetic lease in accordance
actions to address certain adverse tax consequences
with FIN No. 46 (revised). Accordingly, there was no impact
that may be incurred by the holders of such incorrectly
on our financial position, results of operations or cash
priced options. The primary adverse tax consequence is
flows from adoption. However, if the lessor were to change
that the re-measured options vesting after December 31,
its ownership of the property or significantly change its
2004 subject the option holder to a penalty tax under
ownership of other properties that it currently holds, we
Section 409A of the IRC (and, as applicable, similar excise
could be required to consolidate the entity, the leased
taxes under state laws). As a result during the first quarter
facility and the debt in a future period.
of 2007, we recorded $2.5 million, net of income tax, in
Commitments
Capital expenditures were $52.1 million during 2006, $26.4
million during 2005 and $24.4 million during 2004. During
2006, capital expenditures were primarily related to the
implementation of certain systems to streamline business
operations and enhance management reporting capabilities
and leasehold improvements. During 2005, capital
expenditures were primarily related to computer equipment
purchases associated with our research and development
activities, software purchases related to improving our
internal infrastructure and leasehold improvements.
liabilities related to the anticipated payment by us of payroll
and excise taxes on behalf of our employees for options
that were exercised during open tax years under the related
statutes. We expect to incur approximately $0.9 million,
net of income tax, in additional charges to correct future
adverse tax consequences under IRC Section 409A related
to future employee option exercises of incorrectly priced
stock options.
Citrix Systems, Inc.
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Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk includes
$5.1 million. Based on a hypothetical 10% appreciation
“forward-looking statements” that involve risks and
of the U.S. dollar from December 31, 2006 market rates,
uncertainties. Actual results could differ materially from
the fair value of our foreign currency forward contracts
those projected in the forward-looking statements. The
would decrease the asset by $16.9 million, resulting in
analysis methods we used to assess and mitigate risk
a net liability position. Conversely, a hypothetical 10%
discussed below should not be considered projections of
depreciation of the U.S. dollar from December 31, 2006
future events, gains or losses.
market rates would increase the fair value of our foreign
We are exposed to financial market risks, including
currency forward contracts by $16.9 million. In these
changes in foreign currency exchange rates and interest
hypothetical movements, foreign operating costs would
rates that could adversely affect our results of operations
move in the opposite direction. This calculation assumes
or financial condition. To mitigate foreign currency risk, we
that each exchange rate would change in the same
utilize derivative financial instruments. The counterparties
direction relative to the U.S. dollar. In addition to the
to our derivative instruments are major financial institutions.
direct effects of changes in exchange rates quantified
All of the potential changes noted below are based on
above, changes in exchange rates could also change
sensitivity analyses performed on our financial position as
the dollar value of sales and affect the volume of sales as
of December 31, 2006. Actual results could differ materially.
competitors’ products become more or less attractive.
Discussions of our accounting policies for derivatives and
hedging activities are included in Notes 3 and 14 to our
consolidated financial statements included elsewhere in
this Annual Report.
Exposure to Exchange Rates
A substantial majority of our overseas expense and capital
purchasing activities are transacted in local currencies,
including euros, British pounds sterling, Australian
dollars, Swiss francs, Japanese yen, Hong Kong dollars,
Canadian dollars, Danish krone and Swedish krona. To
reduce exposure to reduction in U.S. dollar value and
the volatility of future cash flows caused by changes in
currency exchange rates, we have established a hedging
program. We use foreign currency forward contracts to
hedge certain forecasted foreign currency expenditures.
Our hedging program significantly reduces, but does not
entirely eliminate, the impact of currency exchange
rate movements.
We do not anticipate any material adverse impact to our
consolidated financial position, results of operations,
or cash flows as a result of these foreign exchange
forward contracts.
Exposure to Interest Rates
We have interest rate exposures resulting from our
interest-based available-for-sale securities. We maintain
available-for-sale investments in debt securities and we
limit the amount of credit exposure to any one issuer
or type of instrument. The securities in our 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 and reinvestment
income. If market interest rates were to increase by 100
basis points from December 31, 2006 and 2005 levels,
the fair value of the available-for-sale portfolio would
At December 31, 2006 and 2005, we had in place foreign
decline by approximately $1.8 million and $0.2 million,
currency forward sale contracts with a notional amount of
respectively. These amounts are determined by considering
$56.0 million and $81.7 million, respectively, and foreign
the impact of the hypothetical interest rate movements on
currency forward purchase contracts with a notional
our available-for-sale investment portfolios. This analysis
amount of $220.0 million and $191.5 million, respectively.
does not consider the effect of credit risk as a result of the
At December 31, 2006, these contracts had an aggregate
reduced level of overall economic activity that could exist
fair asset value of $4.6 million and at December 31, 2005,
in such an environment. During the third quarter of 2005,
these contracts had an aggregate fair liability value of
we terminated all of our interest rate swap agreements
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due to the sale of the underlying available-for-sale
stock option granting practices and related accounting
investments. For more information see Notes 5 and 14 to
during the period from January 1996 through December
our consolidated financial statements included elsewhere
2006. This investigation was conducted by the Audit
in this Annual Report.
During 2005, we entered into the Credit Facility, as
amended in 2006, or the Amended Credit Facility.
Accordingly, we could be exposed to market risk from
changes in interest rates on our long-term debt. This
exposure relates to our $100.0 million Amended Credit
Facility. Borrowings under the Amended Credit Facility
currently bear interest at variable rates based on LIBOR
plus 0.32% and adjusts in the future in the range of 0.32%
to 0.80% above LIBOR based on our level of total debt and
our adjusted earnings before interest, taxes, depreciation
and amortization, or EBITDA. A hypothetical 1% interest
rate change would not have any current impact on our
Committee with the assistance of independent outside
legal counsel and outside forensic accounting consultants.
The Audit Committee completed its review in the second
quarter of 2007. In addition, management also reviewed
all grants (consisting of two employee new hire grants)
in December 1995, which was the month we completed
our initial public offering, and all grants to non-employee
directors. Based on the results of the Audit Committee’s
investigation and our review, we have revised the
measurement dates for certain stock options granted
during the period from December 1995 to March 2005,
which required a restatement of our previously issued
financial statements.
results of operations as we have no amounts outstanding
The revised measurement dates resulted from deficiencies
on the Amended Credit Facility as of December 31, 2006.
in our internal control over financial reporting that existed
in prior periods. The last revised measurement date was
in March 2005 and there were no adjustments related to
options granted in 2006. We believe that the likelihood
that a material error in our financial statements could
have originated during 2006 and not have been detected
as of December 31, 2006 is remote. In coming to this
conclusion, management considered, among other things,
changes that we have made in our stock option granting
practices, which are described below, and the impact of
the adjustments to our financial statements for the years
ended December 31, 2005 and 2004. The adjustments
to our consolidated financial statements as of and for the
years ended December 31, 2005 and 2004 principally
resulted from the vesting and tax impacts of measurement
date revisions made to options granted prior to 2004.
In April 2002, we entered into a synthetic lease with
a substantive lessor totaling approximately $61.0
million related to office space utilized for our corporate
headquarters in Fort Lauderdale, Florida. Payments under
this synthetic lease are indexed to a variable interest
rate (LIBOR plus a margin). Based upon our interest rate
exposure under this synthetic lease at December 31, 2006,
a 100 basis point change in the current interest rate would
have an immaterial effect on our financial position and
results of operations. In addition to interest rate exposure,
if the fair value of our headquarters property, under this
synthetic lease, were to significantly decline, there could be
a material adverse effect on our results of operations and
financial condition.
As described in Note 2 to our consolidated financial
statements and in “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” included
elsewhere in this Annual Report in the fourth quarter of
2006, the Audit Committee of our Board of Directors
commenced a voluntary, independent investigation of our
Citrix Systems, Inc.
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Quantitative and Qualitative Disclosures About Market Risk
We have made changes in our stock option granting
practices, processes and controls, which we believe
remediated past deficiencies in our historical stock option
practices, including the following:
•
In response to the requirements of the
Sarbanes-Oxley Act of 2002, we implemented
documentation and accounting policies, processes
and procedures, which led to a segregation
of responsibilities, the addition of reviews and
reconciliations and redefinition of the roles and
responsibilities of the personnel involved in our
stock option granting and accounting processes;
•
In November 2003, our Compensation Committee
delegated authority to our Chief Executive Officer
and our Chief Financial Officer to grant stock
options to our non-executive employees, subject to
certain parameters; and
• Prior to our January 2006 adoption of SFAS
No. 123R and its related interpretations, we
reviewed our stock option granting practices and
revised policies and procedures to comply with the
requirements regarding grant date determinations.
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Controls and Procedures
Evaluation of Disclosure Controls and
Procedures
As of December 31, 2006, our management, with the
• Establishment of improved processes and
procedures for the documentation of corporate
actions approving the grant of stock options,
participation of our President and Chief Executive Officer
including the use of unanimous written consents;
and our Senior Vice President and Chief Financial
and
Officer, evaluated the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15(b)
promulgated under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Based upon that
evaluation, the President and Chief Executive Officer
and the Senior Vice President and Chief Financial Officer
concluded that, as of December 31, 2006, our disclosure
•
Improvements to our processes and procedures
with respect to the timing of recording and
processing equity awards.
Management’s Annual Report on Internal
Control Over Financial Reporting
Our management is responsible for establishing and
controls and procedures were effective in ensuring that
maintaining adequate internal control over financial
material information required to be disclosed by us in
reporting as such term is defined in Exchange Act Rule
the reports that we file or submit under the Exchange
13a – 15(f). Our internal control system was designed to
Act is recorded, processed, summarized and reported
provide reasonable assurance to our management and
within the time periods specified in the Securities and
the Board of Directors regarding the preparation and
Exchange Commission’s rules and forms, including
fair presentation of published financial statements. All
ensuring that such material information is accumulated and
internal control systems, no matter how well designed
communicated to our management, including the President
have inherent limitations. Therefore, even those systems
and Chief Executive Officer and the Senior Vice President
determined to be effective can provide only reasonable
and Chief Financial Officer, as appropriate to allow timely
assurance with respect to financial statement preparation
decisions regarding required disclosure.
and presentation. Our management assessed the
effectiveness of our internal control over financial reporting
as of December 31, 2006. In making this assessment, our
management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control – Integrated Framework (the
COSO criteria). Based on our assessment we believe
that, as of December 31, 2006, our internal control over
financial reporting is effective based on those criteria. The
effectiveness of our internal control over financial reporting
as of December 31, 2006 has been audited by Ernst &
Young LLP, an independent registered public accounting
firm, as stated in their report which appears elsewhere in
this Annual Report.
Changes in Internal Control Over Financial
Reporting
We believe the control deficiencies that existed in prior
years related to our stock option granting practices have
been resolved and management has determined that
there were no material weaknesses in our internal control
over financial reporting as of December 31, 2006. In order
to further enhance our internal controls, management
recommended the following enhancements to our equity
compensation granting policies and procedures to the
Compensation Committee of the Board of Directors, all
of which were approved and implemented by us in the
second quarter of 2007:
• The adoption of a policy requiring that all equity
awards to executive officers and other employees
be granted and priced according to a pre-
determined, fixed schedule each year;
• Revisions and clarifications of the parameters of
the Compensation Committee’s delegation of
authority to our Chief Executive Officer and Chief
Financial Officer to make equity awards;
Citrix Systems, Inc.
2006 Annual Report
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Citrix Systems, Inc.
We have audited Citrix Systems, Inc.’s internal control
necessary to permit preparation of financial statements in
over financial reporting as of December 31, 2006, based
accordance with generally accepted accounting principles,
on criteria established in Internal Control—Integrated
and that receipts and expenditures of the company are
Framework issued by the Committee of Sponsoring
being made only in accordance with authorizations of
Organizations of the Treadway Commission (the COSO
management and directors of the company; and (3) provide
criteria). Citrix Systems, Inc.’s management is responsible
reasonable assurance regarding prevention or timely
for maintaining effective internal control over financial
detection of unauthorized acquisition, use, or disposition of
reporting, and for its assessment of the effectiveness of
the company’s assets that could have a material effect on
internal control over financial reporting included in the
the financial statements.
accompanying Management’s Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to
express an opinion on the company’s internal control over
financial reporting based on our audit.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
We conducted our audit in accordance with the standards
controls may become inadequate because of changes
of the Public Company Accounting Oversight Board
in conditions, or that the degree of compliance with the
(United States). Those standards require that we plan
policies or procedures may deteriorate.
and perform the audit to obtain reasonable assurance
about whether effective internal control over financial
reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the
In our opinion, Citrix Systems, Inc. maintained, in
all material respects, effective internal control over
financial reporting as of December 31, 2006, based on
the COSO criteria.
We have also audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United
assessed risk, and performing such other procedures as
States), the consolidated balance sheets of Citrix Systems,
we considered necessary in the circumstances. We believe
Inc. as of December 31, 2006 and 2005, and the related
that our audit provides a reasonable basis for our opinion.
consolidated statements of income, stockholders’ equity
A company’s internal control over financial reporting is
a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes
in accordance with generally accepted accounting
principles. A company’s internal control over financial
reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
and comprehensive income, and cash flows for each of
the three years in the period ended December 31, 2006
of Citrix Systems, Inc. and our report dated September 7,
2007 expressed an unqualified opinion thereon.
Certified Public Accountants
dispositions of the assets of the company; (2) provide
West Palm Beach, Florida
reasonable assurance that transactions are recorded as
September 7, 2007
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Citrix Systems, Inc.
We have audited the accompanying consolidated balance
As discussed in Note 2, the Company has restated
sheets Citrix Systems, Inc. as of December 31, 2006
previously issued financial statements as of
and 2005, and the related consolidated statements of
December 31, 2005 and for each of the two years in
income, stockholders’ equity and comprehensive income,
the period ended December 31, 2005 to correct for
and cash flows for each of the three years in the period
stock-based compensation.
ended December 31, 2006. 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.
As discussed in Note 7 to the consolidated financial
statements, effective January 1, 2006, the Company
adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-
We conducted our audits in accordance with the standards
Based Payment.
of the Public Company Accounting Oversight Board
(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,
2006 and 2005, and the consolidated results of its
operations and its cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth herein.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United
States), the effectiveness of Citrix Systems, Inc.’s internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our
report dated September 7, 2007 expressed an unqualified
opinion thereon.
Certified Public Accountants
West Palm Beach, Florida
September 7, 2007
Citrix Systems, Inc.
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Consolidated Balance Sheets
(In thousands, except par value)
ASSETS
Current assets:
December 31,
2006
2005
(Restated)
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $4,037 and $4,382 in 2006
$
349,054
152,652
$
484,035
18,900
and 2005, respectively
Inventories, net
Prepaid expenses and other current assets
Current portion of deferred tax assets, net
Total current assets
Restricted cash equivalents and investments
Long-term investments
Property and equipment, net
Goodwill, net
Other intangible assets, net
Long-term portion of deferred tax assets, net
Other assets
Total assets
LIABILITIES AnD STOCkhOLDERS’ EQuITy
Current liabilities:
Accounts payable
Accrued expenses
Income taxes payable
Current portion of deferred revenues
Total current liabilities
Long-term portion of deferred revenues
Long-term debt
Other liabilities
Commitments and contingencies
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;
238,156 and 226,573 shares issued at 2006 and 2005, respectively
Additional paid-in capital
Deferred compensation
Retained earnings
Accumulated other comprehensive income (loss)
Less—common stock in treasury, at cost (59,465 and 49,965
shares in 2006 and 2005, respectively)
Total stockholders’ equity
See accompanying notes.
56
204,974
6,619
45,646
52,792
811,737
63,815
241,675
92,580
631,690
130,462
41,594
10,920
142,015
3,933
31,164
47,362
727,409
63,728
51,286
73,727
591,994
137,333
45,532
7,973
$ 2,024,473
$ 1,698,982
$
45,217
145,664
11,892
332,770
535,543
23,518
—
1,123
$
33,495
131,307
1,329
266,223
432,354
19,803
31,000
1,297
—
—
238
1,655,530
—
1,006,706
4,180
2,666,654
226
1,323,969
(21,417)
823,709
(4,463)
2,122,024
(1,202,365)
(907,496)
1,464,289
1,214,528
$ 2,024,473
$ 1,698,982
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Consolidated Statements of Income
(In thousands, except per share information)
Revenues:
Product licenses
License updates
Online services
Technical services
Total net revenues
Cost of revenues:
Cost of product license revenues
Cost of services revenues
Amortization of product related intangibles
Total cost of revenues
Gross margin
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other intangible assets
In-process research and development
Total operating expenses
Income from operations
Interest income
Interest expense
Write-off of deferred debt issuance costs
Other (expense) income, net
Income before income taxes
Income taxes
Net Income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
See accompanying notes.
Year Ended December 31,
2006
2005
2004
(Restated)
(Restated)
$
488,487
405,756
148,795
91,281
$ 409,435
331,102
99,097
69,088
$ 369,826
271,547
44,101
55,683
1,134,319
908,722
741,157
32,911
46,585
19,202
98,698
14,404
26,929
16,766
58,099
3,824
16,705
6,127
26,656
1,035,621
850,623
714,501
155,331
480,343
178,669
16,934
1,000
832,277
203,344
41,210
(927)
—
(546)
243,081
60,084
182,997
108,751
394,153
125,425
11,622
7,000
646,951
203,672
23,614
(2,426)
—
(506)
224,354
58,745
86,654
337,777
105,799
6,204
19,100
555,534
158,967
14,274
(4,537)
(7,219)
2,851
164,336
33,049
$ 165,609
$ 131,287
1.01
0.97
$
$
0.96
0.93
$
$
0.78
0.75
180,992
187,725
172,221
177,771
168,868
174,374
$
$
$
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Consolidated Statements of Stockholders' Equity and Comprehensive Income
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Common Stock
(In thousands)
Balance at December 31, 2003
Cumulative effect of restatement
Balance at December 31, 2003, as restated
Exercise of stock options
Common stock issued under employee stock purchase plan
Common stock issued for acquisition
Tax benefit from employer stock plans
Stock-based compensation expense
Repurchase of common stock
Cash paid in advance for share repurchase contracts
Unrealized loss on forward contracts and interest rate swaps, net of
reclassification adjustments and net of taxes
Unrealized loss on available-for-sale securities, net of tax
Net income
Total comprehensive income, as restated
Balance at December 31, 2004, as restated
Exercise of stock options
Common stock issued under employee stock purchase plan
Common stock issued for acquisitions
Tax benefit from employer stock plans
Stock-based compensation expense
Repurchase of common stock
Cash paid in advance for share repurchase contracts
Unrealized loss on forward contracts and interest rate swaps, net of
reclassification adjustments and net of in taxes
Charge for compensation expense on non-employee stock options
Unrealized loss on available-for-sale securities, net of tax
Net income
Total comprehensive income, as restated
Balance at December 31, 2005, as restated
Shares issued under stock based compensation plans
Stock-based compensation expense
Common stock issued under employee stock purchase plan
Common stock issued related to acquisitions
Tax benefit from employer stock plans
Write-off of deferred compensation
Repurchase of common stock
Cash paid in advance for share repurchase contracts
Donated treasury shares
Unrealized gain on forward contracts net of reclassification adjustments and net of in taxes
Unrealized gain on available-for-sale securities, net of tax
Net income
Total comprehensive income
Balance at December 31, 2006
*Amounts do not add due to rounding.
See accompanying notes.
58
Shares
202,622
—
202,622
4,492
299
5,578
—
—
—
—
—
—
—
212,991
6,231
449
6,817
—
85
—
—
—
—
—
—
226,573
11,245
—
339
(1)
—
—
—
—
—
—
—
—
Amount
Additional
Paid In
Capital
$ 203
$
700,111
—
143,967
203
4
—
6
—
—
—
—
—
—
—
213
6
—
7
—
—
—
—
—
—
—
—
226
11
—
—
—
—
—
—
—
—
—
—
—
844,078
58,673
4,786
124,416
16,442
(199)
15,782
(53,072)
—
—
—
1,010,906
94,194
7,392
154,260
35,045
21,623
54,963
(54,496)
—
82
—
—
1,323,969
823,709
(4,463)
(21,417)*
(49,965)
(907,496)
1,214,528*
221,736
60,713
8,909
290
40,600
(21,417)
57,074
(36,344)
—
—
—
—
Accumulated
Other
Retained
Earnings
Comprehensive
Income (Loss)
Deferred
Compensation
Common Stock
to Treasury
Shares
(38,150)
Amount
$
646,740
$
7,810
$
—
$
(648,066)
$
706,798
Stockholders’
Comprehensive
Total
Equity
Total
Income
(119,927)
526,813
7,810
(38,150)
(648,066)
(4,458)
(84,613)
658,100
7,489*
(7,196)
(42,608)
(732,679)
(14,220)
(7,357)
(174,817)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
131,287
(164)
(156)
—
(11,485)
(467)
—
—
165,609
8,406
237
—
182,997
(13,647)
(13,647)
6,451
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
21,417
(9,501)
(294,891)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
22
—
—
—
10,393
717,191
58,677
4,786
124,422
16,442
6,252
(68,831)
(53,072)
(164)
(156)
131,287
936,833*
94,200
7,392
154,267
35,045
7,403
(119,854)
(54,496)
82
(467)
165,609
221,747
60,713
8,909
290
40,600
—
(237,817)
(36,344)
22
8,406
237
182,997
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
(164)
(156)
131,287
$ 130,967
$
8,406
237
182,997
$ 191,640
(11,485)
$ (11,485)
—
(467)
165,609
$ 153,657
238,156
$ 238*
$ 1,655,530
$ 1,006,706
$
4,180
$
(59,465)
$ (1,202,365)
$ 1,464,289*
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Consolidated Statements of Stockholders' Equity and Comprehensive Income
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(In thousands)
Balance at December 31, 2003
Cumulative effect of restatement
Balance at December 31, 2003, as restated
Exercise of stock options
Common stock issued for acquisition
Tax benefit from employer stock plans
Stock-based compensation expense
Repurchase of common stock
Common stock issued under employee stock purchase plan
Cash paid in advance for share repurchase contracts
Unrealized loss on forward contracts and interest rate swaps, net of
reclassification adjustments and net of taxes
Unrealized loss on available-for-sale securities, net of tax
Net income
Total comprehensive income, as restated
Balance at December 31, 2004, as restated
Exercise of stock options
Common stock issued for acquisitions
Tax benefit from employer stock plans
Stock-based compensation expense
Repurchase of common stock
Common stock issued under employee stock purchase plan
Cash paid in advance for share repurchase contracts
Unrealized loss on forward contracts and interest rate swaps, net of
reclassification adjustments and net of in taxes
Charge for compensation expense on non-employee stock options
Unrealized loss on available-for-sale securities, net of tax
Net income
Total comprehensive income, as restated
Balance at December 31, 2005, as restated
Shares issued under stock based compensation plans
Stock-based compensation expense
Common stock issued under employee stock purchase plan
Common stock issued related to acquisitions
Tax benefit from employer stock plans
Write-off of deferred compensation
Repurchase of common stock
Cash paid in advance for share repurchase contracts
Donated treasury shares
Unrealized gain on forward contracts net of reclassification adjustments and net of in taxes
Unrealized gain on available-for-sale securities, net of tax
Net income
Total comprehensive income
Balance at December 31, 2006
*Amounts do not add due to rounding.
See accompanying notes.
Common Stock
Additional
Amount
Paid In
Capital
$ 203
$
700,111
—
143,967
Shares
202,622
—
202,622
4,492
299
5,578
6,231
449
6,817
—
—
—
—
—
—
—
—
85
—
—
—
—
—
—
—
—
—
—
—
—
—
—
226,573
11,245
—
339
(1)
203
4
6
—
—
—
—
—
—
—
—
6
7
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
226
11
844,078
58,673
4,786
124,416
16,442
(199)
15,782
(53,072)
94,194
7,392
154,260
35,045
21,623
54,963
(54,496)
—
—
—
—
82
—
—
221,736
60,713
8,909
290
40,600
(21,417)
57,074
(36,344)
—
—
—
—
Total
Stockholders’
Equity
Total
Comprehensive
Income
$
(648,066)
$
706,798
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Deferred
Compensation
$
646,740
$
7,810
$
—
(119,927)
526,813
—
7,810
—
—
—
—
—
—
—
—
—
131,287
—
—
—
—
—
—
—
(164)
(156)
—
(13,647)
(13,647)
—
—
—
—
6,451
—
—
—
—
—
Common Stock
to Treasury
Shares
(38,150)
—
(38,150)
—
—
—
—
—
Amount
—
(648,066)
—
—
—
—
—
(4,458)
(84,613)
—
—
—
—
—
—
—
—
10,393
717,191
58,677
4,786
124,422
16,442
6,252
(68,831)
(53,072)
(164)
(156)
131,287
936,833*
94,200
7,392
154,267
35,045
7,403
(119,854)
(54,496)
—
—
—
—
—
—
—
—
—
—
$
(164)
(156)
131,287
$ 130,967
—
—
—
—
—
—
—
—
(11,485)
$ (11,485)
82
(467)
165,609
—
(467)
165,609
$ 153,657
212,991
213
1,010,906
658,100
7,489*
(7,196)
(42,608)
(732,679)
—
—
—
—
—
—
—
—
—
—
165,609
—
—
—
—
—
—
—
(11,485)
—
(467)
—
—
—
—
—
(14,220)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(7,357)
(174,817)
—
—
—
—
—
—
—
—
—
—
1,323,969
823,709
(4,463)
(21,417)*
(49,965)
(907,496)
1,214,528*
—
—
—
—
—
—
—
—
—
—
—
182,997
—
—
—
—
—
—
—
—
—
8,406
237
—
238,156
$ 238*
$ 1,655,530
$ 1,006,706
$
4,180
$
—
—
—
—
—
21,417
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(9,501)
(294,891)
—
1
—
—
—
—
22
—
—
—
221,747
60,713
8,909
290
40,600
—
(237,817)
(36,344)
22
8,406
237
182,997
(59,465)
$ (1,202,365)
$ 1,464,289*
—
—
—
—
—
—
—
—
—
—
$
8,406
237
182,997
$ 191,640
Citrix Systems, Inc.
2006 Annual Report
5
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Consolidated Statements of Cash Flows
(In thousands)
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
Stock-based compensation expense
Accretion of original issue discount and amortization of financing cost
Write-off of deferred debt issuance costs
In-process research and development
Provision for doubtful accounts
Provision for product returns
Provision for inventory reserves
Deferred income tax benefit
Tax effect of stock-based compensation
Excess tax benefit from exercise of stock options
Other non-cash items
Year Ended December 31,
2006
2005
2004
(Restated)
(Restated)
$ 182,997
$ 165,609
$ 131,287
36,136
27,447
61,596
—
—
1,000
1,978
4,608
3,584
(4,351)
40,600
(51,915)
478
28,388
21,970
7,403
483
—
7,000
146
5,954
383
(14,771)
35,045
—
(325)
12,331
21,247
6,252
4,318
7,219
19,100
1,108
6,663
428
(2,199)
16,442
—
323
Total adjustments to reconcile net income to net cash provided by operating
activities
121,161
91,676
93,232
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, net
Accounts payable
Accrued expenses
Income tax payable
Deferred revenues
Other liabilities
Total changes in operating assets and liabilities, net of effects of acquisitions
Net cash provided by operating activities
(68,271)
(5,869)
(10,092)
(2,868)
11,617
9,554
10,660
10,562
69,599
(334)
24,558
328,716
(28,424)
(1,707)
2,482
234
5,541
12,052
(5,333)
(868)
54,864
(2,983)
35,858
(25,312)
(80)
9,252
(456)
16,585
(1,467)
502
(3,303)
54,118
(9,077)
40,762
293,143
265,281
60
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(In thousands)
Investing activities
Purchases of available for-sale investments
Proceeds from sales of available-for-sale investments
Proceeds from maturities of available-for-sale investments
Proceeds from maturities of held-to-maturity investments
Purchases of property and equipment
Cash paid for acquisitions, net of cash acquired
Cash paid for licensing agreements and core technology
Net cash (used in) provided by investing activities
Financing activities
Proceeds from issuance of common stock
Excess tax benefit from exercise of stock options
Cash paid to repurchase convertible subordinated debentures
Cash paid under stock repurchase programs
Proceeds from term loan and revolving credit facility
Payments on debt
Cash paid for financing fees
Net cash used in 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 (In thousands)
Non-cash investing activity—Increase (decrease) in
restricted cash equivalents and investments
Non-cash financing activity—Fair value of stock issued in connection with
acquisitions
Cash paid for income taxes
Cash paid for interest
See accompanying notes.
Year Ended December 31,
2006
2005
2004
(Restated)
(Restated)
$ (709,565)
170,503
215,318
—
(52,051)
(61,462)
—
$ (183,245)
396,580
141,652
—
(26,377)
(168,347)
—
$ (192,745)
161,846
56,867
195,350
(24,412)
(140,788)
(16,784)
(437,257)
160,263
39,334
230,656
51,915
—
(274,161)
—
(34,850)
—
(26,440)
(134,981)
484,035
101,592
—
—
(174,350)
175,000
(144,000)
(1,098)
(42,856)
410,550
73,485
63,463
—
(355,659)
(121,903)
—
—
—
(414,099)
(109,484)
182,969
$ 349,054
$ 484,035
$
73,485
$
$
$
$
87
$
(85,323)
$
2,591
290
2,330
432
$ 154,266
$ 124,422
$
$
33,755
927
$
$
2,623
559
Citrix Systems, Inc.
2006 Annual Report
61
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notes to Consolidated Financial Statements
1. Organization
Citrix Systems, Inc. (“Citrix” or the “Company”), is a
Delaware corporation founded on April 17, 1989. The
Company designs, develops and markets technology
solutions that allow applications to be delivered, supported
and shared on-demand, securely and at a relatively low
total cost of ownership. The Company markets and
licenses its products through multiple channels such
as value-added resellers, channel distributors, system
integrators, independent software vendors, its Websites
and original equipment manufacturers.
2. Restatement of Consolidated Financial
Statements
In its Form 10-K as of and for the year ended December 31,
2006, the Company restated its consolidated balance
sheet as of December 31, 2005 and the related
consolidated statements of income, stockholders’ equity
and comprehensive income and cash flows for each of
the years in the two-year period ended December 31,
2005, and each of the quarters in its 2006 and 2005 to
reflect additional stock-based compensation expense
and related income tax effects for stock option awards
granted since December 1995 and the financial statement
impact for all subsequent periods. The restatement was
to correct errors identified as the result of a voluntary,
independent investigation of the Company’s historical
stock option granting practices and related accounting
that was conducted by the Audit Committee of its Board
None of the members of the Audit Committee has ever
served on the Compensation Committee of the Board
of Directors. This voluntary investigation was not in
response to any governmental investigation, stockholder
lawsuit, whistleblower complaint, or inquiries from media
organizations. The investigation was conducted with the
assistance of independent outside legal counsel and
outside forensic accounting consultants, and covered
option grants made to all employees during the period
from January 1996 through December 2006. Management
further evaluated all grants (consisting of two employee
new hire grants) in December 1995, which was the month
the Company completed its initial public offering, and all
grants to non-employee directors. The investigation and
related review consisted of approximately 191 grant dates
(representing over 27,000 individual option grants and
approximately 108.7 million stock options).
In connection with its investigation, the Audit Committee
retained independent outside legal counsel that had not
previously been engaged by the Company, to assist in the
investigation. In turn, legal counsel retained outside forensic
accounting experts and other consultants to assist it and
the Audit Committee with financial accounting issues and
related analytics during the investigation. The investigation
occurred over a period of approximately seven months.
The investigative work conducted by the Audit Committee
included the following tasks, among others:
•
Reviewing hard copy and electronic files obtained
of Directors and management’s further review of all grants
from the Company as well as other sources,
(consisting of two employee new hire grants) in December
1995, which was the month the Company completed its
initial public offering.
This Annual Report also reflects the restatement in
totaling approximately 40,000 pages of hard copy
documents and approximately 191,000 electronic
documents, typically consisting of multiple
pages each;
“Selected Consolidated Financial Data” for the fiscal years
•
Conducting more than 50 interviews with
ended December 31, 2005, 2004, 2003 and 2002.
Background
On November 30, 2006, after management conducted
a preliminary, limited scope review of certain of the
Company’s stock option granting practices, the Audit
Committee commenced a voluntary, independent
investigation of the Company’s historical stock option
granting practices and related accounting during the
period from January 1996 through December 2006.
62
present and former directors who have served
on the Compensation Committee during the
relevant period, present and former members of
senior management, other present and former
employees, and former outside professionals who
had provided legal services to the Company during
the period of the investigation;
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•
In connection with its investigation, the members
that Compensation Committee approval was likely obtained
of the Company’s Audit Committee met both
at the next in-person meeting after the date of grant. This
telephonically and in-person numerous times
conclusion was based on the fact that Compensation
and the Chairman of the Audit Committee
Committee members recall signing consents in person at
communicated with the Audit Committee’s counsel
board meetings, that members of management recalled
on a frequent basis; and
that it was the Company’s objective to present consents
• Engaging outside consultants to conduct various
analyses of the Company’s option grants.
to the Committee at in-person meetings, that the consents
contained in the Company’s records typically contain all
signatures on a single page (consistent with having been
Historical Stock Option Granting Practices
signed in person), and that the available meta-data for
Prior to January 1, 2006, the Company accounted for its
such consents generally indicated that the consent forms
stock option grants under APB No. 25 and had provided
were available for signature at that time. The Company
the required disclosures pursuant to the provisions of
generally used the in-person board meeting dates when
Statement of Financial Accounting Standards, or SFAS,
determining revised measurement dates, because
No. 123, Accounting for Stock-Based Compensation . On
members of management responsible for approval and
January 1, 2006, the Company adopted SFAS No. 123R,
processing of these grants believed or acted as if approval
Share-Based Payment , under the modified prospective
was an important and required granting action for all
method. For the measurement date revisions the Company
grants that were not subject to the delegation of authority
has made, the Company revised its historical pro forma
described below. For example, managers involved in
footnote disclosures in accordance with SFAS No. 123.
processing grants: (i) said that they typically refrained from
Additionally, the Company adjusted its 2006 consolidated
correcting grants approved by the Committee without
financial statements to reflect the impact of any revised
further Committee action; but (ii) believed that alteration
measurement dates on the compensation cost recognized
or correction of grant recipient and amount lists prior to
in accordance with SFAS No. 123R.
As permitted by the terms of the Company’s various stock
plans (as amended and restated from time to time), the
Compensation Committee of the Company’s Board of
Directors was vested with the authority to administer and
grant stock options under the plans. During the period to
November 2003, all employee stock option grants were
required to be approved by the Compensation Committee.
Until November 2003 and continuing to the present, the
Compensation Committee delegated authority, subject
to specific parameters, to the Company’s Chief Executive
Officer and Chief Financial Officer to grant options to
non-executive employees. Grants to Section 16 Officers,
Committee approval was permitted (and performed such
corrections and alterations and did not consider them to
be modifications); and (iii) believed Committee approval
was necessary to grant options. There was some evidence
that signatures were sometimes solicited at such meetings
for consents previously signed and transmitted by fax or
other means but because the Company did not retain
these earlier obtained consents there was little evidence
to indicate for which grants these approvals were obtained
and when they were received. Where meta-data or
other evidence led us to conclude that approval was not
complete at the next in person meeting, the Company
relied on the other evidence to select a later date.
to employees whose compensation was subject to
Where meta-data or other evidence led the Company to
Section 162(m) of the Internal Revenue Code of 1986,
conclude that approval was not complete at the next in
as amended, or the IRC, and other grants outside of
person meeting, the Company relied on the other evidence
the parameters discussed below continued to require
to select a later date.
Compensation Committee approval in order to complete
the required granting actions.
From December 1995 through December 2006, the
exercise price for all grants was typically set at the closing
In the restatement, for grants requiring Compensation
price of the Company’s common stock on the original
Committee approval, the Company generally determined
intended grant date. During this period, the Company
Citrix Systems, Inc.
2006 Annual Report
63
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notes to Consolidated Financial Statements
made the following types of grants of stock options to
start date or the first business day of the month following
employees, including officers and members of its Board
the start date or the promotion date; it awarded the
of Directors:
•
Annual grants in conjunction with the Company’s
annual merit review process, which generally
occurred a few months following the Company’s
fiscal year end (referred to as annual grants).
incentive grants on an ad hoc basis. During this period,
the Company made annual grants to executive and non-
executive employees on dates that were typically previously
discussed with the Compensation Committee. Until 2002,
annual grants were generally made in July or August of
each year pursuant to a merit evaluation process. However,
•
Non-annual grants to newly hired and promoted
during these earlier discussions, the Compensation
employees and from time to time to officers in
Committee did not approve the terms and allocation of
recognition of performance or as incentives.
grants to individual recipients or delegate to management
Beginning January 2004, the Company replaced
the authority to do so without further action by the
promotion grants with performance grants that
Compensation Committee. Beginning in 2002, annual
were granted to employees upon recommendation
grants were split into two grant dates in March and August.
by their manager for recognition (new hire and
During this period all employee grants required approval
performance, incentive or promotion grants are
by the Compensation Committee to complete the required
referred to collectively as non-annual grants).
granting actions and for most grants the Company did
•
Options granted or assumed in connection
with acquisitions.
•
Options granted to non-employee members of the
Company’s Board of Directors.
not obtain approval from the Compensation Committee,
typically on unanimous written consent forms, until after
the grant date and for certain grants, the Company had
not completed the process of identifying the recipients or
number of options to be granted until after the grant date.
From December 1995 through mid-1998, all employee
Beginning in November 2003, the Compensation
grants required approval by the Compensation Committee
to complete the required granting actions. In addition, the
Company did not have a defined process for determining
the date on which the Company made grants and no
granting pattern could be established for grants made
during this period. Following the investigation, the Audit
Committee concluded that the Company likely set grant
dates retrospectively for many stock options granted
to employees and executives during the 1996 to
mid-1998 period.
Beginning in mid-1998 through late 2003, all employee
grants required approval by the Compensation Committee
to complete the required granting actions. During this
period, the Company made changes in its stock option
granting practices which included implementing a practice
where the Company typically dated non-annual grants
to non-executives on the first business day of the month
following the start or promotion date, unless that date was
the first day of the month, in which case the grant date
would be that date. The Company dated non-annual new
hire and promotion grants to executives either on their
Committee delegated its authority to the Company’s Chief
Executive Officer and Chief Financial Officer to issue stock
options pursuant to specific parameters. The delegation
provided authority to grant no more than 4 million stock
options per year in the aggregate and to grant up to
10,000 options per year to any employee who was not an
officer subject to Section 16 of the Securities Exchange
Act of 1934, as amended, and whose compensation was
not subject to Section 162(m) of the Internal Revenue
Code of 1986 as amended, or the IRC. In July 2004 the
Compensation Committee increased that number to
20,000 options per employee per year. The delegation was
also subject to other parameters, including that each grant
be consistent in number with guidelines that provided the
range of grants that could be awarded to each employee
grade. Compensation Committee approval continued to be
a required granting action for all stock option grants outside
of the parameters of the delegated authority. For grants
outside of the delegation of authority, the Compensation
Committee often approved such grants at a meeting or
by unanimous written consent form. In some cases the
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amount granted to each recipient was not final and/or the
Compensation Committee had not approved the grants by
Adjustments to Measurement Dates Arising from Errors
Identified by Audit Committee Investigation
the intended grant date.
The Company also made grants to the employees of
companies it acquired in connection with acquisitions.
Grants made in conjunction with acquisitions were typically
authorized at the time of the Board’s approval of the
acquisition. The exercise price of such grants was typically
set at the closing stock price of the Company’s common
stock on the closing date of the acquisition. During the
investigation, the Company noted one grant date where the
grant was approved by its Board of Directors in conjunction
with the acquisition; however, the Company had not
completed the required granting actions by the stated grant
date and the measurement date was revised to the date
that the evidence indicated that the Company completed
its allocation.
The Company also grants options to the non-employee
members of its Board of Directors, or the Board Grants,
pursuant to a stockholder approved plan, as amended
from time to time. The timing of the grant date and amount
of such awards was granted pre-determined pursuant to a
formula set forth either in the terms of the plan or via board
resolution. Certain Board Grants were issued on a date
other than the automatic grant date prescribed by the plan
or differed by nominal amounts from the option amount
pre-determined by the plan formula.
Prior to the restatement discussed below, the Company
used the grant dates as set forth above as the
measurement date for financial accounting purposes.
Based on the facts obtained as a result of the Audit
Committee’s investigation, the Company identified certain
grants for which it used an incorrect measurement date for
financial accounting purposes, as defined under Generally
Accepted Accounting Principles in the United States, or
GAAP. To determine the correct measurement dates for
these grants under applicable accounting principles, the
Company followed the guidance in APB No. 25, which
deems the “measurement date” to be the first date on
which all of the following are known with finality: (1) the
identity of the individual employee who is entitled to
receive the option grant; (2) the number of options that
the individual employee is entitled to receive; and (3) the
option’s exercise price.
The Company completed a grant date by grant date
analysis of approximately 191 option grant dates during
the relevant period for compliance with APB No. 25. Each
individual grant on each grant date was evaluated based on
its particular facts and circumstances. Where the Company
determined that it did not complete the required granting
actions by the original grant date, it used judgment to
determine corrected measurement dates consistent with
what the evidence suggested was its practice or process
or other information obtained as part of the investigation
that suggested the date upon which all requirements for
a measurement date had been satisfied under applicable
accounting principles. If the measurement date was not
the same date the Company used previously, it made
accounting adjustments as required, which resulted in
Accordingly, in each case the exercise price did not exceed
stock-based compensation and related tax effects when an
the closing stock price of the Company’s common stock
option had intrinsic value on the revised measurement date.
on that date, and the Company did not record stock-based
compensation expense in connection with these grants. In
the restatement, the Company revised the measurement
dates for many grants and recorded stock-based
compensation expense when the revised measurement
date resulted in intrinsic value which the Company
accounted for in the restatement.
The documents and information considered in connection
with the measurement date adjustments that the Company
has made included, but was not limited to:
•
•
minutes of Board of Directors and Compensation
Committee meetings and related presentations;
unanimous written consents signed by the
Compensation Committee members, and evidence
relating to the date such consents were created
and circulated for signature and/or signed;
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notes to Consolidated Financial Statements
•
•
information contained in personnel files maintained
•
information obtained during interviews conducted by
for employees who were granted options;
the Audit Committee’s outside counsel of numerous
electronic mail messages and other electronic files
retrieved from the Company’s computer system
and in back up media;
•
documentation prepared in connection with the
Company’s annual performance reviews of employees
individuals, including current and former officers,
directors, employees and outside professionals; and
•
analyses of the Company’s option grant performed
by consultants engaged on behalf of the
Audit Committee.
•
•
•
as part of the process of determining the allocation of
Consistent with current accounting literature and published
stock option grants to individual employees;
guidance from the staff of the SEC, the Company
information as to the date of hire of the employee
receiving the option grant, including (if the grant was
a new hire grant) the date of any offer letter;
classified grants during the eleven-year period subject to
the investigation into categories based on grant type and
process by which the grant was finalized. The principal
categories related to annual and non-annual grants in three
correspondence, memoranda and other
time periods: (1) January 1996 through May 1998; (2) May
documentation supporting the option grant;
1998 through November 2003; and (3) November 2003
information concerning the date or dates on which a
stock option was entered into the Company’s stock
option tracking system, Equity Edge;
through December 2006. The Company also separately
categorized grants to non-employee directors. The last
grant with a revised measurement date was awarded in
March 2005. There were no revised measurement dates in
2006. A summary of pre-tax stock-based compensation
expense related to options awarded in each time period, in
thousands, is as follows:
Time Period
January 1996 through May 1998 (includes two grants made in December 1995)
May 1998 through November 2003
November 2003 through December 2005
Cumulative effect at December 31, 2005
Pre-Tax
Stock-based
Compensation
Expense
$
62,171
103,272
224
$ 165,667
January 1996 – May 1998: In the restatement, the
grant dates for many stock options granted to employees
Company corrected the measurement dates for all 50
and executives during the January 1996 through May
original grants dates during this period, consisting of
1998 period. In addition, the required granting actions for
approximately 24.2 million options. The Company also
many of these grants were not completed on the original
revised measurement dates for all grants (consisting of two
measurement date. During this period, a substantial
employee new hire grants) in December 1995, which was
majority of the grants were approved using unanimous
the month the Company completed its initial public offering.
written consent forms signed by the Compensation
After completion of its investigation, the Audit Committee
concluded that the Company followed processes and
procedures that likely led to the retrospective selection of
Committee for which, in most cases, there was no
documentary evidence of when approval was obtained. As
discussed above, for grants where there was insufficient
evidence to determine when approval was obtained, the
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Company generally used the date of the first in-person
these grants were made on predetermined annual grant
Board of Directors meeting after the evidence suggested
dates or the first business day of the month following
that the amount and terms of the grant were final as
the employee’s hire date or performance recognition
the revised measurement date for financial accounting
and were issued pursuant to an underlying system of
purposes. Where evidence existed of advance approval by
processes, controls and management approvals. After
the Compensation Committee (such as facsimile header
the award was communicated to the employee and the
dates on signed unanimous written consent forms), the
administrative processes were complete the CFO signed
Company used this information as evidence of when
an internal delegation of authority form after the grant
the Compensation Committee approval was obtained,
date. The Company concluded that the CFO’s signature
and used that date as the revised measurement date for
on these documents was perfunctory and was not a
financial accounting purposes.
required granting action. During this period, approximately
May 1998 – November 2003: During this period the
Company issued approximately 70.5 million options over
87 grant dates. In the restatement, the Company corrected
measurement dates for approximately 50.6 million options
granted on 79 of the 87 grants dates. The Company made
these corrections because it did not complete the required
granting actions by the original grant date, including,
obtaining approvals from the Compensation Committee
and not finalizing the amounts or recipients as of the
original grant date.
3% of the individual non-executive employee grants
(or 7% of the total non-executive employee options)
awarded pursuant to the delegation process exceeded
the delegation limitations discussed above and should
have been presented for approval by the Compensation
Committee. Although these grants were not approved by
the Compensation Committee, they were communicated
to employees and processed pursuant to the same system
of processes, controls and management approvals as
grants within the limitations. The Company has concluded
that these grants were legally outstanding and that the
During this period, a substantial majority of the grants were
requirements to establish a measurement date were met
approved using unanimous written consent forms signed
on the original grant date.
by the Compensation Committee for which, in most cases,
there was no documentary evidence of when approval
was actually obtained. As discussed above, where there
was insufficient evidence to determine when approval
conclusively was obtained, the Company generally used
the date of the first in-person Board of Directors meeting
after the evidence suggested that the amount and terms
of the grant were final as determined by management as
the revised measurement date for financial accounting
purposes. However, if there was evidence sufficient for the
Company to conclude that the required granting actions
were completed on a date that was earlier than the next
in-person Board meeting, in accordance with APB No.25,
the Company set the revised measurement date at the
earlier date.
November 2003 – December 2006: Beginning in
November 2003, the Company granted 9.5 million
options to employees on 42 grant dates pursuant to
delegated authority described above. In virtually all cases
The Company revised the measurement date for the non-
executive annual grant originally dated April 1, 2004. The
grant was issued pursuant to the delegation of authority
above and was revised because the Company had not
completed the process of determining grant amounts
and recipients until after the grant date. The Company
determined revised measurement dates for each individual
recipient through May 20, 2004 by assessing when each
grant was fixed with finality as reflected in hard copy and
electronic documents and other information. This was
the only grant date that options issued under delegated
authority were revised and the Company recognized total
pre-tax stock compensation expense of approximately $0.2
million related to this grant.
Compensation Committee approval continued to be a
required granting action for all stock option grants outside
of the parameters of the delegated authority, as described
above. For grants outside of the delegation of authority,
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notes to Consolidated Financial Statements
the Compensation Committee typically approved such
•
The Company awarded approximately 0.1 million
grants at a meeting or by unanimous written consent form.
options in June 2002 to non-employee directors.
During this period, the Compensation Committee approved
The grant was one day later than the automatic date
2.6 million options on 19 grant dates. The Company
prescribed by the stockholder approved plan and the
determined that for seven of these grant dates, the original
number of options were nominally different from the
grant date differed from the appropriate measurement
plan formula (aggregate difference of 770 options).
date for financial accounting purposes. The Company
Based on the available evidence, the Company
recorded approximately $32,000 in pre-tax stock-based
concluded that the grant date error constituted
compensation expense related to these grants. The last
a modification of the automatic grant that should
grant for which the Company revised the measurement
have occurred on the previous day. The Company
date was March 1, 2005.
Board Grants. From 1996 through 2006, the Company
made 48 grants to non-employee directors on 21 grant
dates for a total of 3.1 million options. The Company revised
the measurement dates for certain of these grants because
they were awarded on dates other than the automatic
concluded that the grant was fixed with finality on
the date awarded and the dating error and share
differences resulted in compensation expense of
approximately $5,000, representing the difference in
the intrinsic value between the automatic grant date
prescribed by the plan and the original grant date.
dates prescribed in the applicable stockholder plan and
•
In 2000, the Company awarded an anniversary grant
in amounts that differed nominally from the formulas set
for approximately 0.2 million options in error one year
forth in the plan. The Company recognized approximately
after the actual anniversary date of the director. The
$0.5 million in pre-tax stock-based compensation expense
Company considered the grant a modification of the
related to the following grants:
•
The Company awarded to non-employee
directors an aggregate of 0.7 million options on
five grant dates between 1998 and 2002. Instead
of awarding these options on the anniversary
date of the directors’ appointment to the Board,
prescribed automatic grant under the stockholder
approved plan and concluded that the grant was
fixed with finality on the grant date. However, no
compensation expense resulted as the closing price
of the Company’s common stock increased from the
automatic grant date to the grant date of the award.
they were awarded on the first day of the month
Other Measurement Date Judgments
containing the directors’ anniversary date, in
The Company identified other circumstances related to
error. These options were issued between three
approximately 4.2 million options (approximately 3.8%
and 21 days in advance of the actual anniversary
of options issued) that resulted in revised measurement
date. The Company determined that the grants
dates. In some instances, the Company made changes
were not fixed with finality until the anniversary
date prescribed by the plan because that date
represents the date on which approval existed
pursuant to the stockholder approved plan.
after the grant date to add individuals to the list of grant
recipients and received later approval by the Compensation
Committee. In other instances, the Company issued
options that were different in amount than that approved
The Company revised the measurement dates
by the Compensation Committee or issued options for
accordingly, and recognized pre-tax compensation
which the Company was unable to locate the approval
expense of $0.5 million representing the difference
documentation during the investigation. In each of these
in intrinsic value between grant date prescribed by
circumstances, the Company evaluated the existing
the plan and the original grant date.
information related to each individual grant and it
established a new measurement date when it determined
that the terms of the award were fixed with finality.
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Impact of the Errors on the Company’s Financial
Statements
The Company determined that after accounting for
forfeitures, the errors described above, resulted in an
understatement of stock-based compensation expense,
after tax, over the respective awards vesting terms. As
indicated above, most of the adjusted measurement
dates were prior to December 31, 2004. Accordingly,
additional compensation expense related to grant date
changes subsequent to December 2003 was nominal.
The additional compensation expense in 2004 and 2005
reflected below primarily relates to the impact of vesting on
awards granted prior to 2004. A summary of total charges,
including estimated employment related tax charges, which
are comprised of withholding taxes, penalties and interest,
by fiscal period, in thousands, is as follows:
Year Ended December 31,
1996
1997
1998
1999
2000
2001
2002
2003
Cumulative effect at December 31, 2003
2004
2005
Total
Pre-Tax
Expense
Employment
Related Tax
Charges
Income
Taxes
$
$
1,826
6,509
14,598
24,557
40,627
34,926
20,271
12,985
156,299
6,226
3,142
—
128
1,221
4,819
8,069
4,073
(830)
(3,042)
14,438
(6,031)
(2,127)
$
(689)
(2,526)
(4,442)
(8,411)
(14,019)
(11,844)
(5,837)
(3,042)
(50,810)
161
(423)
Net
Charge to
Net
Income
$
1,137
4,111
11,377
20,965
34,677
27,155
13,604
6,901
119,927
356
592
$ 165,667
$
6,280
$ (51,072)
$ 120,875
In addition to the amounts reflected above, for the year
based compensation expense, if any, for each of the years
ended December 31, 2005, the Company had previously
ended December 31, 1996 through December 31, 2004
recognized $4.3 million in stock-based compensation
was not material. The total pre-tax stock-based
expense related to stock-based awards. Accordingly, total
compensation expense for the period from January 1, 1996
pre-tax stock-based compensation expense 2005 was
through December 31, 2005 was approximately
approximately $7.4 million. Previously recorded stock-
$170.0 million.
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notes to Consolidated Financial Statements
The following table reflects the impacts of the restatement adjustments on the Company’s consolidated statements of
income for the periods presented below (in thousands):
Category of Adjustments:
Pre-tax stock-based compensation expense related to stock
option measurement date changes
Other tax charges
Income tax impact on other tax charges
Income tax adjustments related to IRC Section 162 (m)
Income tax impact related to stock option compensation
expense date changes
Total income tax adjustments
Total charge to net income
Cumulative
Effect from
January 1, 1996
through
December 31, 2003
$
156,299
14,438
(3,848)
494
(47,456)
(50,810)
$ 119,927
2005
2004
$ 3,142
(2,127)
727
(288)
$ 6,226
(6,031)
1,963
—
(862)
(423)
$
592
$
(1,802)
161
356
In this Annual Report, the Company recorded pre-tax
pricing of certain options, the Company has taken and
stock-based compensation expense of approximately $3.1
intends to take further actions to address certain adverse
million and $6.2 million for the years ended December 31,
tax consequences that may be incurred by the holders of
2005 and 2004, respectively, and $156.3 million related to
such incorrectly priced options. The primary adverse tax
years prior to fiscal 2004. There was no impact on revenue
consequence is that the re-measured options vesting after
or cash and investments as a result of this additional stock
December 31, 2004 subject the option holder to a penalty
compensation expense and the adjustments related to the
tax under Section 409A of the IRC (and, as applicable,
Company’s historical stock option granting practices.
similar excise taxes under state laws). As a result during
The cumulative effect of the restatement adjustments
on the consolidated balance sheet at December 31,
2005 was an increase in additional paid-in capital, offset
by a corresponding decrease in retained earnings and
deferred compensation, which results in no net effect on
stockholders’ equity. There were also adjustments made
to increase the Company’s short and long-term deferred
tax assets and its accrued expenses due to the tax effects
of the restatement. The adjustments decreased previously
reported basic net income per share by $0.01 for the
the first quarter of 2007, the Company has recorded
$2.5 million, net of income tax, in liabilities related to the
anticipated payment by the Company of payroll and excise
taxes on behalf of the Company’s employees for options
that were exercised during open tax years under the related
statutes. The Company expects to incur approximately
$0.9 million, net of income tax, in additional charges to
correct future adverse tax consequences under IRC
Section 409A related to future employee option exercises
of incorrectly priced options.
year ended December 31, 2005 and had no impact on
Additionally, the Company believes that United States
previously reported basic net income per share for the
tax deductions taken for stock option exercises in
year ended December 31, 2004. The adjustments had no
prior years, which pertained to certain executives may
impact on previously reported diluted net income per share
not be deductible under limitations imposed by IRC
for the years ended December 31, 2005 and 2004.
Section 162(m). Section 162(m) limits the deductibility of
Tax Related Issues
Because virtually all holders of stock options granted by
the Company were not involved in or aware of the incorrect
compensation above $1 million to certain executive officers
of public companies when such compensation is not
incentive based. As a result, the Company has reduced its
available tax net operating loss carry-forwards arising from
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certain previously exercised stock options. The Company
The Company restated its prior year income tax amounts
restated its tax provisions in the periods in which the
in Note 12 to reflect the impacts of the adjustments
benefits were recorded.
described above.
As a result of the review, the Company also determined that
Additionally, the Company has restated the pro forma
it failed to properly withhold employment (the employee
amortization of deferred stock compensation included
and Company portions of FICA and supplemental federal
in net income, net of tax, and total stock-based
withholding) taxes associated with certain stock option
compensation expenses determined under the fair value
exercises. The Company recorded such amounts in
based method, under SFAS No. 123 to reflect the impact of
the consolidated statements of income in the period in
the stock-based compensation expense resulting from the
which the Company was originally obligated to make the
correction of option grants in the investigation.
withholding. Additionally, for tax years where the statute
of limitations has lapsed, the Company has recorded the
reduction in previously recorded liabilities in the period the
statute of limitations expires. The Company has recorded
approximately $8.0 million, net of income tax, through
December 31, 2006 for employment taxes and
related charges.
The following table presents the effect of the related
adjustments on the pro forma calculation of the net
income per share under SFAS No. 123 for the years ended
December 31, 2005 and 2004 (in thousands, except per
share amounts):
Net income:
Add: Total stock-based compensation
expense included in reported net
income, net of tax
Deduct: Total stock-based
compensation expense determined
using fair value method, net of tax
Year Ended December 31, 2005
Year Ended December 31, 2004
As
Reported Adjustments
As
Restated
As
Reported Adjustments
As
Restated
$ 166,340
$
(731)
$ 165,609 $ 131,546
$
(259)
$ 131,287
2,744
3,023
5,767
—
5,159
5,159
(37,881)
(594)
(38,475)
(48,043)
1,041
(47,002)
Pro forma net income
$ 131,203
$ 1,698
$ 132,901 $ 83,503
$ 5,941
$ 89,444
Basic net income per share:
As reported
Pro forma
Diluted net income per share
As reported
Pro forma
$
$
$
$
0.97
0.76
0.93
0.74
$
$
$
$ (0.01)
0.01
$
$
0.96 $
0.77 $
— $
0.01
$
0.93 $
0.75 $
0.78
0.49
0.75
0.48
$
—
$ 0.04
$
—
$ 0.03
$
$
$
$
0.78
0.53
0.75
0.51
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notes to Consolidated Financial Statements
The following table presents the effects of the stock-based compensation and related tax adjustments made to the
Company’s previously reported consolidated balance sheet as of December 31, 2005 (in thousands, except per
share amounts):
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Current portion of deferred tax assets, net
Total current assets
Restricted cash equivalents and investments
Long-term investments
Property and equipment, net
Goodwill, net
Other intangible assets, net
Long-term portion of deferred tax assets, net
Other assets
As
Reported
Adjustments
As
Restated
$
484,035
18,900
142,015
3,933
31,164
46,410
726,457
63,728
51,286
73,727
591,994
137,333
29,158
7,973
$
—
—
—
—
—
952
952
—
—
—
—
—
16,374
—
$
484,035
18,900
142,015
3,933
31,164
47,362
727,409
63,728
51,286
73,727
591,994
137,333
45,532
7,973
Total assets
$ 1,681,656
$
17,326
$ 1,698,982
LIABILITIES AnD STOCkhOLDERS’ EQuITy
Current liabilities:
Accounts payable
Accrued expenses
Income taxes payable
Current portion of deferred revenues
Total current liabilities
Long-term portion of deferred revenues
Long-term debt
Other liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock at $.01 par value: 5,000 shares authorized
Common stock at $.001 par value: 1,000,000 shares authorized
Additional paid-in capital
Deferred compensation
Retained earnings
Accumulated other comprehensive loss
Less — common stock in treasury, at cost
Total stockholders’ equity
$
33,495
125,029
1,329
266,223
426,076
19,803
31,000
1,297
—
226
1,189,460
(18,873)
944,626
(4,463)
2,110,976
(907,496)
1,203,480
$
—
6,278
—
—
6,278
—
—
—
$
33,495
131,307
1,329
266,223
432,354
19,803
31,000
1,297
—
—
134,509
(2,544)
(120,917)
—
11,048
—
11,048
—
226
1,323,969
(21,417)
823,709
(4,463)
2,122,024
(907,496)
1,214,528
$ 1,681,656
$
17,326
$ 1,698,982
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The following table presents the effects of the stock-based compensation and related tax adjustments made to the
Company’s previously reported consolidated statements of income (in thousands, except share and per share amounts):
Year Ended December 31, 2005
Year Ended December 31, 2004
assets
11,622
—
11,622
6,204
Revenues:
Product licenses
License updates
Online services
Technical services
Total net revenues
Cost of revenues:
Cost of product license revenues
Cost of services revenues
Amortization of product related
intangibles
Total cost of revenues
Gross margin
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other intangible
$ 409,435
331,102
99,097
69,088
908,722
14,404
26,794
16,766
57,964
850,758
108,687
393,420
125,538
In-process research and
development
Total operating expenses
Income from operations
Interest income
Interest expense
Write-off of deferred debt issuance
costs
Other (expense) income, net
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average shares
outstanding:
Basic
Diluted
As
Reported Adjustments
As
Restated
As
Reported Adjustments
$
— $ 409,435
331,102
—
99,097
—
69,088
—
$ 369,826
271,547
44,101
55,683
$ —
—
—
—
—
908,722
741,157
—
741,157
As
Restated
$ 369,826
271,547
44,101
55,683
—
135
—
135
14,404
26,929
16,766
58,099
3,824
16,472
6,127
26,423
(135)
850,623
714,734
64
733
(113)
108,751
394,153
125,425
86,357
337,566
106,516
—
233
—
233
(233)
297
211
(717)
—
—
(209)
(24)
—
(170)
—
97
3,824
16,705
6,127
26,656
714,501
86,654
337,777
105,799
6,204
19,100
555,534
158,967
14,274
(4,537)
(7,219)
2,851
7,000
646,267
204,491
23,614
(2,229)
—
(368)
—
684
(819)
—
(197)
—
(138)
7,000
646,951
203,672
23,614
(2,426)
19,100
555,743
158,991
14,274
(4,367)
—
(506)
(7,219)
2,754
225,508
59,168
$ 166,340
224,354
(1,154)
58,745
(423)
(731) $ 165,609
$
164,433
32,887
$ 131,546
(97)
162
$ (259)
164,336
33,049
$ 131,287
$
$
0.97
$ (0.01) $
0.93
$
— $
0.96
$
0.93 $
0.78
$ —
$
0.75
$ —
$
0.78
0.75
172,221
178,036
—
(265)
172,221
177,771
168,868
174,734
—
(360)
168,868
174,374
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notes to Consolidated Financial Statements
Shares used for purposes of computing the diluted
The restatement did not impact net cash flows from
earnings per share are different in this Annual Report as
operating, investing or financing activities. However, certain
unearned stock compensation, significant amounts of
items within net cash provided by operating activities
which were recorded as part of the restatement have been
were impacted by the adjustments. The following table
presented in stockholders’ equity, is considered proceeds
presents the effects of the stock-based compensation
for purposes of applying the treasury stock method to
and related tax adjustments made to the Company’s
determine incremental common shares to be included
previously reported consolidated cash flows from operating
in diluted shares in periods in which the Company has
activities (in thousands):
reported net income.
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
Stock-based compensation expense
Accretion of original issue discount and
amortization of financing cost
Write-off of deferred debt issuance costs
In-process research and development
Provision for doubtful accounts
Provision for product returns
Provision for inventory reserves
Deferred income tax benefit
Tax effect of stock-based compensation
Other non-cash items
Total adjustments to reconcile net
income to net cash provided by
operating activities
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, net
Accounts payable
Accrued expenses
Income tax payable
Deferred revenues
Other liabilities
2005
2004
December 31,
As
Reported Adjustments
As
Restated
As
Reported Adjustments
As
Restated
$ 166,340
$
(731)
$ 165,609 $ 131,546
$
(259)
$ 131,287
28,388
—
28,388
12,331
—
12,331
21,970
4,261
—
3,142
483
—
7,000
146
5,954
383
(14,348)
38,336
(325)
—
—
—
—
—
—
(423)
(3,291)
—
21,970
7,403
483
—
7,000
146
5,954
383
(14,771)
35,045
(325)
21,247
26
4,318
7,219
19,100
1,108
6,663
428
(2,360)
20,875
323
—
6,226
—
—
—
—
—
—
161
(4,433)
—
21,247
6,252
4,318
7,219
19,100
1,108
6,663
428
(2,199)
16,442
323
92,248
(572)
91,676
91,278
1,954
93,232
(28,424)
(1,707)
2,482
234
2,111
12,052
(3,206)
(868)
54,864
(2,983)
—
—
(28,424)
(1,707)
(25,312)
(80)
—
—
(25,312)
(80)
—
—
3,430
—
(2,127)
—
—
—
2,482
234
5,541
12,052
(5,333)
(868)
54,864
(2,983)
9,252
(456)
12,249
(1,467)
6,533
(3,303)
54,118
(9,077)
—
—
4,336
(6,031)
—
—
—
9,252
(456)
16,585
(1,467)
502
(3,303)
54,118
(9,077)
Total changes in operating assets
and liabilities, net of effects of
acquisitions
34,555
Net cash provided by operating activities $ 293,143
74
1,303
—
$
35,858
42,457
$ 293,143 $ 265,281
(1,695)
—
$
40,762
$ 265,281
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3. Significant Accounting Policies
Consolidation Policy
The consolidated financial statements of the Company
include the accounts of its wholly-owned subsidiaries in
the Americas, Europe, the Middle East and Africa (“EMEA”)
and Asia-Pacific. All significant transactions and balances
between the Company and its subsidiaries have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2006 and
2005 consist of marketable securities, which are primarily
money market funds, commercial paper, agency securities,
corporate securities and municipal 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
primarily in investment grade, highly liquid instruments.
term. The Company does not recognize changes in the fair
value of its investments in income unless a decline in value
is considered other-than-temporary in accordance with the
Financial Accounting Standards Board (the “FASB”) Staff
Position 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.
The Company minimizes its credit risk associated with
investments by investing primarily in investment grade,
highly liquid securities. The Company’s policy is designed
to limit exposure to any one issuer depending on credit
quality. Periodic evaluations of the relative credit standing
of those issuers are considered in the Company’s
investment strategy. The Company uses information
provided by third parties to adjust the carrying value of
certain of its investments and derivative instruments to fair
value at the end of each period. Fair values are based on
valuation models that use market quotes and, for certain
investments, assumptions as to the creditworthiness of the
Restricted Cash Equivalents and Investments
entities issuing those underlying instruments.
Restricted cash equivalents and investments at
December 31, 2006 and 2005 are primarily comprised of
$62.8 million in investment securities and cash equivalents
pledged as collateral for specified obligations under the
Company’s synthetic lease arrangement. The Company
maintains the ability to manage the composition of the
restricted cash equivalents and investments within certain
limits and to withdraw and use excess investment earnings
from the restricted collateral for operating purposes. For
further information, see Note 11.
Investments
Accounts Receivable
The Company’s accounts receivable are due from
value-added resellers, distributors and end customers.
Collateral is not required. Product returns are provided
for in the consolidated financial statements and have
historically been within management’s expectations.
The Company also maintains allowances for doubtful
accounts for estimated losses resulting from the inability
of the Company’s customers to make payments. The
Company periodically reviews these estimated allowances,
including an analysis of the customers’ payment history
Short-term and long-term investments at December 31,
and creditworthiness. The allowance for doubtful accounts
2006 and 2005 primarily consist of corporate securities,
was $2.4 million and $2.1 million as of December 31,
agency securities, commercial paper, municipal securities
2006 and 2005, respectively. If the financial condition of a
and government securities. Investments classified as
significant distributor or customer were to deteriorate, the
available-for-sale are stated at fair value with unrealized
Company’s operating results could be adversely affected.
gains and losses, net of taxes, reported in accumulated
No distributor or customer accounted for more than 10% of
other comprehensive income (loss). Investments classified
gross accounts receivable at December 31, 2006 or 2005.
as held-to-maturity are stated at amortized cost. In
accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 95, Statement of Cash Flows, the
Company classifies available-for-sale securities, including
its investments in auction rate securities that are available to
meet the Company’s current operational needs, as short-
Inventory
Inventories are stated at the lower of cost or market on
a first-in, first out basis and primarily consist of finished
goods. As of December 31, 2006 and 2005, the provision
to reduce obsolete or excess inventories to market was
$5.2 million and $0.6 million, respectively.
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notes to Consolidated Financial Statements
Property and Equipment
disposition. Measurement of an impairment loss is based
Property and equipment is stated at cost. Depreciation
on the fair value of the asset compared to its carrying value.
is computed using the straight-line method over the
Long-lived assets and certain identifiable intangible assets
estimated useful lives of the assets, which is generally three
to be disposed of are reported at the lower of carrying
years for computer equipment, software, office equipment
amount or fair value less costs to sell. During 2006, 2005
and furniture, the lesser of the lease term or five years for
and 2004, the Company did not recognize any impairment
leasehold improvements, which is the estimated useful
charges associated with its long-lived or intangible assets.
life, seven years for the Company’s enterprise resource
planning system and 40 years for buildings. Depreciation
expense was $27.4 million, $22.0 million and $21.2 million
for 2006, 2005 and 2004, respectively.
Goodwill
The Company accounts for goodwill in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142, requires that goodwill and certain intangible
During 2006 and 2005, the Company retired $3.3 million
assets are not amortized, but are subject to an annual
and $8.0 million, respectively, in property and equipment
impairment test. At December 31, 2006 and 2005,
that were no longer in use. At the time of retirement, the
the Company had $631.7 million and $592.0 million of
remaining net book value of these assets was immaterial
goodwill, respectively. There was no impairment of goodwill
and no asset retirement obligations were associated
as a result of the annual impairment tests completed
with them.
Property and equipment consist of the following:
(In thousands)
Buildings
Computer equipment
Software
Equipment and furniture
Leasehold improvements
Land
$
December 31,
2006
2005
$
17,781
86,001
68,185
21,453
46,532
9,062
17,781
66,594
53,479
19,401
39,075
9,062
during the fourth quarters of 2006 and 2005. Excluding
goodwill, the Company has no intangible assets deemed
to have indefinite lives. Substantially all of the Company’s
goodwill at December 31, 2006 and December 31, 2005
was associated with the Americas and Online Services
reportable segments. See Note 4 for acquisitions and Note
13 for segment information.
Intangible Assets
The Company has intangible assets with finite lives that
are recorded at cost, less accumulated amortization.
249,014
205,392
Amortization is computed over the estimated useful lives
Less accumulated depreciation
and amortization
(156,434)
(131,665)
$
92,580
$
73,727
Long-Lived Assets
The Company reviews for impairment of long-lived assets
and certain identifiable intangible assets to be held and
used whenever events or changes in circumstances
indicate that the carrying amount of such assets may
not be fully recoverable. Determination of recoverability
is based on an estimate of undiscounted future cash
flows resulting from the use of the asset and its eventual
of the respective assets, generally three to seven years,
except for patents, which are amortized over the lesser of
their remaining life or ten years. In accordance with SFAS
No. 86, Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed, the Company
records acquired core and product technology at net
realizable value and reviews this technology for impairment
on a periodic basis by comparing the estimated net
realizable value to the unamortized cost of the technology.
There has been no impairment of these assets for any of
the periods presented.
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Intangible assets consist of the following (in thousands):
Core and product technologies
Other
Total
Core and product technologies
Other
Total
December 31, 2006
Gross
Carrying
Amount
$ 137,071
85,754
$ 222,825
Accumulated
Amortization
Weighted
Average
Life
$
$
55,301 5.58 years
37,062 5.29 years
92,363 5.47 years
December 31, 2005
Gross
Carrying
Amount
$ 165,975
81,254
$ 247,229
Accumulated
Amortization
Weighted
Average
Life
$
84,255 5.27 years
25,641 4.88 years
$ 109,896 5.14 years
Other intangible assets consist primarily of customer
Software Development Costs
relationships, trade names, covenants not to compete
SFAS No. 86, Accounting for the Costs of Computer
and patents. Amortization of product related intangible
Software to be Sold, Leased, or Otherwise Marketed,
assets includes amortization of core and product
requires certain software development costs to be
technologies and patents and is reported as a cost of
capitalized upon the establishment of technological
revenues in the accompanying consolidated statements of
feasibility. The establishment of technological feasibility
income. Amortization of other intangible assets includes
and the ongoing assessment of the recoverability of these
amortization of customer relationships, trade names and
costs requires considerable judgment by management
covenants not to compete and is reported as an operating
with respect to certain external factors such as anticipated
expense in the accompanying consolidated statements
future revenue, estimated economic life, and changes
of income.
Estimated future annual amortization expense is as follows
(in thousands):
Year ending December 31,
2007
2008
2009
2010
2011
$ 33,319
30,245
25,609
22,205
11,686
During 2006, the Company retired approximately $56.8
million of fully amortized intangible assets that were no
longer in use from its books. During 2004, the Company
reclassified certain acquired intangible assets to goodwill
to adjust the purchase price allocation resulting from a
2001 acquisition. The adjustment resulted in a $4.4 million
reduction of amortization expense, net of related tax effect
of $2.8 million in 2004.
in software and hardware technologies. Software
development costs incurred beyond the establishment of
technological feasibility have not been significant.
The Company accounts for software developed for internal
use pursuant to the American Institute of Certified Public
Accountants Statement of Position (“SOP”) No. 98-1,
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use . Pursuant to SOP No. 98-1,
the Company capitalizes external direct costs of materials
and services used in the project and internal costs such as
payroll and benefits of those employees directly associated
with the development of internal use software and software
developed related to its online service offerings. The
amount of costs capitalized in 2006 and 2005 relating to
internal use software was $18.7 million and $7.2 million,
respectively. These costs are being amortized over the
estimated useful life of the software, which is generally
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notes to Consolidated Financial Statements
three to seven years, and are included in property and
criteria are met: persuasive evidence of the arrangement
equipment in the accompanying consolidated
exists; delivery has occurred and the Company has no
balance sheets.
Revenue Recognition
The Company markets and licenses products primarily
remaining obligations; the fee is fixed or determinable; and
collectibility is probable. The Company defines these four
criteria as follows:
through multiple channels such as value-added resellers,
•
Persuasive evidence of the arrangement exists.
channel distributors, system integrators, independent
software vendors, its Websites and original equipment
manufacturers. The Company’s product licenses are
generally perpetual. The Company also separately sells
license updates and services, which may include product
training, technical support and consulting services, as well
as online services.
The Company’s software products are purchased by
medium and small-sized businesses, with a minimal
number of locations, and larger business enterprises
with more complex multiserver environments that deploy
the Company’s software products on a departmental
or enterprise-wide basis. Products may be delivered
indirectly by channel distributors or original equipment
manufacturers or directly to the end-user by the Company
via packaged product or download from the Company’s
Website. The Company’s appliance products are integrated
with software that is essential to the functionality of the
equipment. The Company provides license updates for
appliances, which include unspecified software upgrades
and enhancements through its maintenance contracts.
Accordingly, for these appliances, the Company accounts
for revenue in accordance with SOP No. 97-2, “ Software
Revenue Recognition, (as amended by SOP 98-4 and SOP
98-9)” and all related interpretations, as described in detail
below. The Company’s online services are purchased by
small and medium sized businesses, as well as, individuals
and are centrally hosted on the Company’s Websites.
Revenue is recognized when it is earned. The Company’s
revenue recognition policies are in compliance with
SOP 97-2 and related amendments and interpretations.
In addition, the Company’s online services revenue is
recognized in accordance with Emerging Issues Task
Force (“EITF”) No. 00-3, Application of AICPA Statement
of Position 97-2 to Arrangements That Include the Right to
Use Software Stored on Another Entity’s Hardware. The
Company recognizes revenue when all of the following
The Company recognizes revenue on packaged
products and appliances upon shipment to
distributors and resellers. For packaged product
and appliance sales, it is the Company’s customary
practice to require a purchase order from
distributors and resellers who have previously
negotiated a master packaged product distribution
or resale agreement. For electronic and paper
license arrangements, the Company typically
requires a purchase order from the distributor,
reseller or end-user (depending on the arrangement)
and an executed product license agreement from
the end-user. For technical support, product training
and consulting services, the Company requires a
purchase order and an executed agreement. For
online services, the Company requires the customer
or the reseller to electronically accept the terms of
an online services agreement or execute a contract.
•
Delivery has occurred and the Company has
no remaining obligations. For product license
and appliance sales, the Company’s standard
delivery method is free-on-board shipping point.
Consequently, it considers delivery of packaged
products and appliances to have occurred when the
products are shipped pursuant to an agreement and
purchase order. The Company considers delivery
of licenses under electronic licensing agreements
to have occurred when the related products are
shipped and the end-user has been electronically
provided the software activation keys that allow
the end-user to take immediate possession of
the product. For product training and consulting
services, the Company fulfills its obligation when
the services are performed. For license updates,
technical support and online services, the Company
assumes that its obligation is satisfied ratably over
the respective terms of the agreements, which are
typically 12 to 24 months.
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•
The fee is fixed or determinable. In the normal
related to online service agreements and are recognized
course of business, the Company does not provide
ratably over the contract term. Technical Services revenues
customers the right to a refund of any portion of
are comprised of fees from technical support services
their license fees or extended payment terms.
which are recognized ratably over the contract term as
The Company sells license updates and services,
well as revenues from product training and certification,
which includes technical support, product training
and consulting services revenue related to implementation
and consulting services, and online services
of the Company’s products, which is recognized as the
separately and it determines vendor specific
services are provided.
objective evidence (“VSOE”) of fair value by the
price charged for each of these items when sold
separately or based on applicable renewal rates.
The Company licenses most of its products bundled
with a one year contract for license updates that provide
the end-user with free enhancements and upgrades to
•
Collectibility is probable. The Company determines
the licensed product on a when and if available basis.
collectibility on a customer-by-customer basis and
Customers may also elect to purchase subscriptions for
generally does not require collateral. The Company
license updates, when not bundled with the initial product
typically sells product licenses and license updates
release or purchase, technical support, product training
to distributors or resellers for whom there are
or consulting services. The Company allocates revenue to
histories of successful collection. New customers
license updates and any other undelivered elements of the
are subject to a credit review process that evaluates
arrangement based on VSOE of fair value of each element
their financial position and ultimately their ability
and such amounts are deferred until the applicable delivery
to pay. Customers are also subject to an ongoing
criteria and other revenue recognition criteria described
credit review process. If the Company determines
above have been met. The balance of the revenue, net of
from the outset of an arrangement that collectibility
any discounts inherent in the arrangement, is recognized at
is not probable, revenue recognition is deferred
the outset of the arrangement using the residual method as
until customer payment is received and the other
the product licenses are delivered. If management cannot
parameters of revenue recognition described above
objectively determine the fair value of each undelivered
have been achieved. Management’s judgment is
element based on the VSOE of fair value, revenue
required in assessing the probability of collection,
recognition is deferred until all elements are delivered, all
which is generally based on evaluation of customer
services have been performed, or until fair value can be
specific information, historical experience and
objectively determined.
economic market conditions.
In the normal course of business, the Company does
Net revenues include the following categories: Product
not permit product returns, but it does provide most of
Licenses, License Updates, Online Services and Technical
its distributors with stock balancing and price protection
Services. Product Licenses primarily represent fees
rights. Stock balancing rights permit distributors to return
related to the licensing of the Company’s software and
products to the Company by the forty-fifth day of the fiscal
appliance products. These revenues are reflected net of
quarter, subject to ordering an equal dollar amount of
sales allowances, cooperative advertising agreements
the Company’s other products prior to the last day of the
and provisions for stock balancing return rights. License
same fiscal quarter. Price protection rights require that the
Updates consist of fees related to the Subscription
Company grant retroactive price adjustments for inventories
Advantage program that are recognized ratably over the
of products held by distributors if it lowers prices for
term of the contract, which is typically 12-24 months.
such products. The Company establishes provisions for
Subscription Advantage is a renewable program that
estimated returns for stock balancing and price protection
provides subscribers with immediate access to software
rights, as well as other sales allowances, concurrently with
upgrades, enhancements and maintenance releases
the recognition of revenue. The provisions are established
when and if they become available during the term of the
based upon consideration of a variety of factors, including,
contract. Online Services revenues consist primarily of fees
Citrix Systems, Inc.
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notes to Consolidated Financial Statements
among other things, recent and historical return rates
Cost of Revenues
for both, specific products and distributors, estimated
Cost of product license revenues consists primarily of
distributor inventory levels by product, the impact of any
hardware, product media and duplication, manuals,
new product releases and projected economic conditions.
packaging materials, shipping expense, server capacity
Actual product returns for stock balancing and price
costs and royalties. In addition, the Company is a party
protection provisions incurred are, however, dependent
to licensing agreements with various entities, which give
upon future events, including the amount of stock
the Company the right to use certain software code in
balancing activity by distributors and the level of distributor
its products or in the development of future products
inventories at the time of any price adjustments. The
in exchange for the payment of fixed fees or amounts
Company continually monitors the factors that influence the
based upon the sales of the related product. The licensing
pricing of its products and distributor inventory levels and
agreements generally have terms ranging from one to five
makes adjustments to these provisions when it believes
years, and generally include renewal options. However,
actual returns and other allowances could differ from
some agreements may be perpetual unless expressly
established reserves. The Company’s ability to recognize
terminated. Royalties and other costs related to these
revenue upon shipment to distributors is predicated on its
agreements are included in cost of revenues. Cost of
ability to reliably estimate future stock balancing returns.
services revenue consists primarily of compensation
If actual experience or changes in market condition
and other personnel-related costs of providing technical
impairs the Company’s ability to estimate returns, it would
support and consulting, as well as, the Company’s online
be required to defer the recognition of revenue until the
services. Also included in cost of revenues is amortization
delivery of the product to the end-user. Allowances for
of product related intangible assets which includes
estimated product returns amounted to approximately
acquired core and product technology and
$1.7 million and $2.3 million at December 31, 2006 and
associated patents.
December 31, 2005, respectively. The Company has not
reduced and has no current plans to reduce its prices
for inventory currently held by distributors. Accordingly,
there were no reserves required for price protection at
December 31, 2006 and 2005. The Company also records
estimated reductions to revenue for customer programs
and incentive offerings including volume-based incentives.
If market conditions were to decline, the Company could
take actions to increase its customer incentive offerings,
which could result in an incremental reduction to revenue at
the time the incentive is offered.
Foreign Currency
The functional currency of each of the Company’s wholly-
owned foreign subsidiaries is the U.S. dollar. Monetary
assets and liabilities of the subsidiaries are remeasured into
U.S. dollars at year end exchange rates, and revenues and
expenses are remeasured at average rates prevailing during
the year. Remeasurement and foreign currency transaction
(losses) gains of approximately $(0.2) million, $(0.4) million
and $1.8 million for the years ended December 31, 2006,
2005, and 2004, respectively, are included in other
(expense) income, net, in the accompanying consolidated
Product Concentration
statements of income.
The Company derives a substantial portion of its revenues
from its Presentation Server product and anticipates that
this product and future derivative products and product
lines based upon this technology will continue to constitute
a majority of its revenue. The Company could experience
declines in demand for products, whether as a result of
general economic conditions, new competitive product
releases, price competition, lack of success of its strategic
partners, technological change or other factors.
Derivatives and Hedging Activities
In accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and its
related interpretations and amendments, the Company
records derivatives as either assets or liabilities on the
balance sheet and measures those instruments at fair
value. For derivatives that are designated as and qualify
as effective cash flow hedges, the portion of gain or
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loss on the derivative instrument effective at offsetting
provider provides substantiation of qualified expenditures.
changes in the hedged item is reported as a component
The Company estimates the impact of these expenses and
of accumulated other comprehensive income (loss) and
recognizes them at the time of product sales as a reduction
reclassified into earnings as operating income (expense)
of net revenue or as a component of sales, marketing
when the hedged transaction affects earnings. For
and support expenses in the accompanying consolidated
derivative instruments that are designated as and qualify as
statements of income. The Company recognized
effective fair value hedges, the gain or loss on the derivative
advertising expenses of approximately $54.2 million,
instrument as well as the offsetting gain or loss on the
$38.8 million and $35.2 million, during the years ended
hedged item attributable to the hedged risk is recognized
December 31, 2006, 2005 and 2004, respectively.
in current earnings as interest income (expense) during
the period of the change in fair values. Derivatives not
designated as hedging instruments are adjusted to fair
value through earnings as other (expense) income in the
period the changes in fair value occur. The application of
the provisions of SFAS No. 133 could impact the volatility
of earnings.
The Company formally documents all relationships
between hedging instruments and hedged items, as
well as its risk-management objective and strategy for
undertaking various hedge transactions. This process
Income Taxes
The Company estimates income taxes based on rates
in effect in each of the jurisdictions in which it operates.
Deferred income tax assets and liabilities are determined
based upon differences between the financial statement
and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the
differences are expected to reverse. The realization of
deferred tax assets is based on historical tax positions
and expectations about future taxable income. Valuation
allowances are recorded related to deferred tax assets
includes attributing all derivatives that are designated as
based on the “more likely than not” criteria of SFAS
cash flow hedges to floating rate assets or liabilities or
No. 109, Accounting for Income Taxes .
forecasted transactions and attributing all derivatives that
are designated as fair value hedges to fixed rate assets or
liabilities. The Company also formally assesses, both at the
inception of the hedge and on an ongoing basis, whether
each derivative is highly effective in offsetting changes in
cash flows or fair value of the hedged item. Fluctuations in
the value of the derivative instruments are generally offset
by changes in the hedged item; however, if it is determined
that a derivative is not highly effective as a hedge or if
a derivative ceases to be a highly effective hedge, the
Company will discontinue hedge accounting prospectively
for the affected derivative.
Advertising Expense
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. Significant estimates made by management include
the provision for doubtful accounts receivable, provision for
estimated returns for stock balancing and price protection
rights, as well as other sales allowances, the assumptions
used in the valuation of stock-based awards, the valuation
of the Company’s goodwill, net realizable value of core and
product technology, the provision for vacant facility costs,
The Company expenses advertising costs as incurred. The
the provision for income taxes and the amortization and
Company has cooperative advertising agreements with
depreciation periods for intangible and long-lived assets.
certain distributors and resellers whereby the Company will
While the Company believes that such estimates are fair
reimburse distributors and resellers for qualified advertising
when considered in conjunction with the consolidated
of Citrix products. The Company also has advertising
financial position and results of operations taken as a
agreements with, and purchases advertising from, online
whole, the actual amounts of such estimates, when known,
media providers to advertise its online services products.
will vary from these estimates.
Reimbursement is made once the distributor, reseller or
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notes to Consolidated Financial Statements
Accounting for Stock-Based Compensation
per share due to their anti-dilutive effect for the respective
The Company has various stock-based compensation
periods in which they were outstanding. The reconciliation
plans for its employees and outside directors. Effective
of the numerator and denominator of the earnings per
January 1, 2006, the Company adopted the fair value
share calculation is presented in Note 15.
recognition provisions of SFAS No. 123R, Share-Based
Payment , and related interpretations using the
modified-prospective transition method. Under that
method, compensation cost recognized in 2006 includes
(a) compensation cost for all stock-based awards granted
prior to, but not yet vested as of January 1, 2006 based on
the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123 and (b) compensation
cost for all stock-based awards granted on or subsequent
to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS
No. 123R. Results for prior periods have not been restated.
Prior to January 1, 2006, the Company accounted for its
stock-based compensation plans under the recognition
and measurement provisions of Accounting Principles
Board (“APB”) Opinion No. 25, Accounting for Stock
Issued to Employees , and related interpretations, as
permitted by SFAS No. 123, Accounting for Stock-
Based Compensation. The Company did not recognize
compensation cost related to stock options granted
to its employees and non-employee directors that had
an exercise price equal to or above the market value of
the underlying common stock on the date of grant in its
consolidated statement of income prior to January 1, 2006.
See Note 7 for further information regarding the Company’s
stock-based compensation plans.
Earnings per Share
Basic earnings per share is calculated by dividing income
available to stockholders by the weighted-average number
of common shares outstanding during each period.
Diluted earnings per share is computed using the weighted
average number of common and dilutive common share
equivalents outstanding during the period. Dilutive
common share equivalents consist of shares issuable
upon the exercise of certain stock options (calculated
using the treasury stock method). Certain shares under
the Company’s stock-based compensation programs
were excluded from the computation of diluted earnings
Reclassifications
Certain reclassifications of the prior years’ financial
statements have been made to conform to the current
year’s presentation.
4. Acquisitions
2006 Acquisitions
During 2006, the Company acquired all of the issued
and outstanding capital stock of two privately held
companies, Reflectent Software, Inc., a provider of
solutions to monitor the real-time performance of client-
server, Web and desktop applications from an end-user
perspective, and Orbital Data Corporation, a provider
of solutions that optimize the delivery of applications
over wide area networks, (the “2006 Acquisitions”). The
2006 Acquisitions strengthen the Company’s Application
Delivery Infrastructure products which are designed to
offer comprehensive solutions across all dimensions
of application delivery. The total consideration for the
2006 Acquisitions was $68.0 million comprised of cash
paid of $65.1 million and other costs related primarily to
estimated direct transaction costs of $2.9 million including
approximately $0.3 million related to stock-based awards
that were granted and vested upon consummation of
the acquisitions. As part of the 2006 Acquisitions, the
Company assumed approximately 0.4 million non-vested
stock-based awards upon the closing of the transaction.
See Note 7 for more information regarding the stock-
based awards assumed. Revenues from the acquired
products are primarily included in the Company’s Product
License revenue and Technical Services revenue in the
accompanying consolidated statements of income.
The sources of funds for consideration paid in these
transactions consisted of available cash and investments.
The 2006 Acquisitions results of operations have been
included in the Company’s consolidate results of operations
beginning after the date of the respective acquisitions and
are not significant in relation to the Company’s consolidated
financial statements. Accordingly, they are excluded from
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the pro forma disclosures presented below.
based on their estimated fair values as of the date of the
Under the purchase method of accounting, the purchase
price for the 2006 Acquisitions was allocated to the
acquired companies’ net tangible and intangible assets
completion of the respective acquisition. The allocation
of the total purchase price is summarized below
(in thousands):
Current assets
Property and equipment
Other assets
In-process research and development
Intangible assets
Goodwill
Assets acquired
Current liabilities assumed
Net assets acquired, including direct transaction costs
Asset
Life
Various
3-6 years
Indefinite
Purchase
Price
Allocation
$
5,153
1,595
4,543
1,000
20,910
44,353
77,554
(9,530)
$ 68,024
Current assets acquired and current liabilities assumed in
Acquisitions was assigned to the Company’s Americas
connection with the 2006 Acquisitions consisted mainly
segment and is not deductible for tax purposes. See Note
of short-term investments, accounts receivable, inventory,
13 for segment information.
other accrued expenses, short-term debt and deferred
revenues. Other assets consisted primarily of deferred tax
assets. The $44.4 million of goodwill related to the 2006
Identifiable intangible assets purchased in the 2006
Acquisitions, in thousands, and their weighted average lives
are as follows:
Covenants not to compete
Trade name
Customer relationships
Core and product technologies
Total
Weighted
Life
3.0 years
5.0 years
4.7 years
5.7 years
$
110
400
3,100
17,300
$ 20,910
2005 Acquisitions
for Certain Transactions Involving Stock Compensation (an
During 2005, the Company acquired all of the issued and
Interpretation of APB Opinion No. 25) and was recorded
outstanding capital stock of two privately held companies,
as deferred compensation in the accompanying 2005
NetScaler, Inc. and Teros, Inc. (the “2005 Acquisitions”)
consolidated balance sheet, The assumed awards had an
for a total of $172.8 million in cash, 6.6 million shares of
excess of fair value over intrinsic value of $0.5 million, which
the Company’s common stock valued at $154.8 million
is reflected in the total consideration for the transaction.
and estimated direct transaction costs of $6.2 million.
In addition, in 2006, the Company received an immaterial
The Company also assumed $20.6 million in non-
vested stock-based compensation upon the closing
number of shares related to non-tendering payees of the
2005 Acquisitions. The 2005 Acquisitions further extend
of the NetScaler transaction that was accounted for in
the Company’s Application Delivery Infrastructure, which
accordance with FASB Interpretation No. 44, Accounting
are designed to offer comprehensive solutions across all
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notes to Consolidated Financial Statements
dimensions of application delivery. Revenues from the
beginning after their respective acquisition dates and are
acquired products are primarily included in the Company’s
reflected for the full year 2006. The following unaudited pro
Product License revenue and Technical Services revenue
forma information combines the consolidated results of
in the accompanying consolidated statements of income.
operations of Citrix and the companies that it acquired as if
In connection with the 2005 Acquisitions, the Company
the acquisitions had occurred at the beginning of fiscal year
allocated $230.0 million to goodwill, $40.2 million to
2004 (in thousands, except per share data):
core technology and $35.8 million to other intangible
assets. The Company assigned all of the goodwill to its
Americas segment.
2004 Acquisitions
During 2004, the Company acquired all of the issued and
outstanding capital stock of two privately held companies
Net6, Inc., a leader in providing secure access gateways
and Expertcity.com, Inc., a leader in Web-based desktop
access, as well as, a leader in Web-based meeting and
customer assistance services (the “2004 Acquisitions”).
The consideration for the 2004 Acquisitions was $291.0
million comprised of $161.8 million in cash, $6.1 million
of direct transaction costs and 5.8 million shares of the
Company’s common stock valued at $124.8 million.
The common stock valued at $124.8 million included
$118.0 million related to the initial purchase price and
the remaining balance is primarily related to additional
common stock earned by Expertcity.com, Inc., upon
the achievement of certain revenue and other financial
milestones during 2004 pursuant to the applicable merger
agreement, which were issued in March 2005. The fair
value of the common stock earned as additional purchase
price consideration was recorded as goodwill on the date
earned. In connection with the 2004 Acquisitions, the
Company allocated $195.1 million to goodwill, $38.7 million
to core and product technology and $32.4 million to other
intangible assets. The Company assigned $31.7 million of
the goodwill to its Americas segment and $163.4 million
of the goodwill to its Citrix Online Division. The sources of
funds for consideration paid in these transactions consisted
of available cash and investments and the Company’s
authorized common stock. There is no additional
contingent consideration related to the transactions.
2005 and 2004 Acquisitions Pro Forma Disclosure
The results of operations of the 2005 and 2004 Acquisitions
were included in the Company’s results of operations
Revenues
Income from operations
Net income
Per share - basic
Per share - diluted
December 31,
2005
2004
(Restated)
(Restated)
$ 934,039 $ 770,339
89,498
85,023
0.48
0.47
168,367
141,617
0.80
0.77
Purchase Accounting for Acquisitions
The fair values used in determining the purchase price
allocation for certain intangible assets for the Company’s
acquisitions were based on estimated discounted future
cash flows, royalty rates and historical data, among
other information. Purchased in-process research and
development (“IPR&D”) of $1.0 million, $7.0 million and
$19.1 million was expensed immediately upon the closing
of the 2006 Acquisitions, 2005 Acquisitions and 2004
Acquisitions, respectively, in accordance with FASB
Interpretation No. 4, Applicability of FASB Statement No. 2
to Business Combinations Accounted for by the Purchase
Method, due to the fact that it pertained to technology that
was not currently technologically feasible, meaning it had
not reached the working model stage, did not contain all of
the major functions planned for the product, was not ready
for initial customer testing and had no alternative future
use. The fair value assigned to IPR&D was determined
using the income approach, which includes estimating the
revenue and expenses associated with a project’s sales
cycle and by estimating the amount of after-tax cash flows
attributable to the projects. The future cash flows were
discounted to present value utilizing an appropriate risk-
adjusted rate of return, which ranged from 17% to 25%.
The rate of return included a factor that takes into account
the uncertainty surrounding the successful development of
the IPR&D.
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Ardence Delaware, Inc.
if certain conditions in the agreement are satisfied prior
On January 5, 2007, the Company acquired all of the
to the closing of the acquisition. In addition, in connection
issued and outstanding capital stock of Ardence Delaware,
with the acquisition, the Company will issue approximately
Inc. (“Ardence”), a leading provider of solutions that allow
1.4 million unvested shares of the Company’s common
information technology administrators to set up and
stock and it will assume approximately 3.4 million stock
configure PCs, servers, and Web servers in real time from
options each of which will be exercisable for the right to
a centrally managed source. This acquisition strengthens
receive one share of the Company’s common stock upon
the Company’s application delivery capabilities with more
vesting. Transaction costs associated with the acquisition
robust streaming and provisioning technologies that
are currently estimated at $3.7 million. In addition, the
improve information technology agility, increase security
Company estimates that it will expense approximately
and reliability, and offer new options for how businesses
$8.0 to $10.0 million in IPR&D upon the closing
deliver applications and desktops to end-users. The
of the transaction.
consideration paid to the stockholders of Ardence in this
transaction was cash of approximately $50.6 million. In
addition, the Company incurred approximately $2.0 million
in acquisition related costs and it assumed approximately
0.2 million unvested stock-based instruments, each of
which will be exercisable for the right to receive one share
of the Company’s common stock upon vesting.
XenSource, Inc., Acquisition
The Sevin Rosen funds, a venture capital firm, is a
stockholder in XenSource. Stephen Dow, a member of
the Company’s Board of Directors, is a general partner
of the Sevin Rosen funds and does not directly hold any
interest in XenSource. Although the Sevin Rosen funds
are represented on the Board of Directors of XenSource,
Mr. Dow is not a director of XenSource. The Company’s
acquisition of XenSource, if closed, will provide a return
On August 14, 2007, the Company signed a definitive
to all partners of the Sevin Rosen funds, including
agreement to acquire XenSource, Inc. (“XenSource”)
Mr. Dow. Subject to certain assumptions, the Company
a privately held leader in enterprise-grade virtual
currently estimates that the potential allocation to Mr. Dow
infrastructure solutions. The acquisition will move the
through the general partner entities of the Sevin Rosen
Company into adjacent server and desktop virtualization
funds related to the Merger is approximately $1.9 million.
markets that will allow it to extend its leadership in the
Mr. Dow has been on the Company’s Board of Directors
broader Application Delivery Infrastructure market by
adding key enabling technologies that make the end-
since 1989 and currently owns 262,349 shares of its
common stock. Mr. Dow did not attend the meeting at
to-end computing environment more flexible, dynamic
which the Company’s Board approved the transaction and
and responsive to business change. The closing of the
recused himself from the vote to approve the transaction.
acquisition is targeted for the fourth quarter of 2007
Consistent with the Company’s policies and the charter
and is subject to XenSource stockholder and regulatory
of the Nominating and Corporate Governance Committee
approvals. The acquisition has received clearance under
of the Company’s Board of Directors, the acquisition of
the Hart-Scott-Rodino Antitrust Improvements Act of
XenSource was reviewed and approved by the Nominating
1976. The Company plans to fund the acquisition through
and Corporate Governance Committee. There are no
the use of its available cash and stock. In accordance
material relationships among the Company and XenSource
with the terms of the agreement, the Company will issue
or any of their respective affiliates or any of the parties
approximately 4.2 million shares of its common stock
to the agreement to acquire XenSource and related
to the stockholders of XenSource and they will receive
agreements, other than in respect of such agreements
approximately $175.5 million in cash consideration. The
themselves and as disclosed herein.
number of shares, however, could increase to 6.5 million
and the cash consideration could decrease to $92.5 million
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notes to Consolidated Financial Statements
5. Cash and Investments
Cash and cash equivalents and investments consist of
the following:
(In thousands)
Cash and cash equivalents:
Money market funds
Commercial paper
Cash
Agency securities
Municipal securities
Corporate securities
Total
Reported as:
December 31,
2006
2005
$ 166,097
145,238
28,761
19,586
2,854
2,769
$ 74,097
385,873
38,333
18,317
2,976
20,211
$ 365,305
$ 539,807
Cash and cash equivalents
$ 349,054
$ 484,035
Restricted cash equivalents
interest rate swaps. The realized net gain related to the sale
of the investments and the termination of the interest rate
swaps was not material. Gross realized gains and losses
on sales of securities during 2006, 2005 and 2004 were
not material. At December 31, 2006, the average original
contractual maturity of the Company’s short-term available-
for-sale investments was approximately 12 months. The
Company’s long-term available-for-sale investments at
December 31, 2006 included $241.7 million of investments
with original contractual maturities ranging from one to 37
years. The average remaining maturities of the Company’s
short-term and long-term available-for-sale investments,
including restricted investments, at December 31, 2006
were approximately five months and ten years, respectively.
In addition, included in short-term available-for-sale
investments are auction rate securities of $13.2 million
and investments
$ 16,251
$ 55,772
that generally reset every seven to 35 days. The Company
Short-term investments:
Corporate securities
Agency securities
Commercial paper
Municipal securities
Total
Reported as:
$ 100,197
55,709
28,785
11,150
$
—
7,956
—
18,900
$ 195,841
$ 26,856
Short-term investments
$ 152,652
$ 18,900
Restricted cash equivalents
and investments
$ 43,189
$
7,956
Long-term investments:
Corporate securities
Agency securities
Government securities (1)
Other
Municipal securities
Total
Reported as:
$ 159,879
76,774
6,191
1,831
1,375
$ 50,000
—
—
1,286
—
also owns $1.8 million in equity investments not due at a
single maturity date classified as long-term investments at
December 31, 2006.
The Company has investments in two instruments with an
aggregate face value of $50.0 million that include structured
credit risk features related to certain referenced entities.
Under the terms of these debt instruments, the Company
assumes the default risk, above a certain threshold, of a
portfolio of specific referenced issuers in exchange for a
fixed yield that is added to the London Interbank Offered
Rate (“LIBOR”)-based yield on the debt instrument. In
the event of default by any of the underlying referenced
issuers above specified amounts, the Company will pay
the counterparty an amount equivalent to its loss, not to
exceed the face value of the instrument. The primary risk
$ 246,050
$ 51,286
associated with these instruments is the default risk of the
underlying issuers. The credit ratings of these instruments
Long-term investments
$ 241,675
$ 51,286
are equivalent to the likelihood of an event of default under
Restricted cash equivalents
and investments
$
4,375
$
—
“AAA” or “AA” rated individual securities. The purpose of
these instruments is to provide additional yield on certain
(1) Includes investments in United States securities.
of the Company’s available-for-sale investments. These
The Company’s investments are classified as available-
for-sale and are recorded at fair value. During 2005,
the Company sold $193.9 million of fixed rate available-
for-sale investments. Simultaneous with the sale of the
investments, the Company also terminated the related
instruments mature in November 2007 and February 2008.
To date there have been no credit events for the underlying
referenced entities resulting in losses to the Company. The
Company separately accounts for changes in the fair value
of the investments and as of December 31, 2006 and 2005
there was no material change in fair value.
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The change in net unrealized securities gains (losses)
stock plans or its superseded and expired stock plans
recognized in other comprehensive income includes
(including the Amended and Restated 1995 Stock Plan,
unrealized gains (losses) that arose from changes in market
Second Amended and Restated 2000 Director and Officer
value of specifically identified securities that were held
Stock Option and Incentive Plan, Second Amended and
during the period and gains (losses) that were previously
Restated 1995 Non-Employee Director Stock Option Plan
unrealized, but have been recognized in current period
and Third Amended and Restated 1995 Employee Stock
net income due to sales or maturities of available-for-
Purchase Plan (the “1995 ESPP”)). Awards previously
sale securities. This reclassification has no effect on total
granted under the Company’s superseded and expired
comprehensive income or stockholders’ equity and was
stock plans that are still outstanding, however, typically
immaterial for all periods presented. The unrealized gain
expire ten years from the date of grant and will continue to
(loss) associated with each individual category of cash
be subject to all the terms and conditions of such plans,
and investments was not significant for either of the
as applicable. During the second quarter of 2006, the
periods presented.
6. Accrued Expenses
Accrued expenses consist of the following:
Company began awarding non-vested stock units and non-
vested stock awards with performance measures to certain
senior members of management as part of its overall
compensation program. In addition, during the second
(In thousands)
2006
2005
non-employee directors non-vested stock units with
December 31,
quarter of 2006, the Company also began awarding its
(restated)
service based vesting.
Accrued compensation and
employee benefits
$ 47,425 $ 39,473
Under the terms of the 2005 Plan, the Company is
authorized to grant incentive stock options (“ISOs”),
Accrued cooperative advertising
and marketing programs
Accrued taxes
Other
17,017
44,102
37,120
14,539
42,765
34,530
non-qualified stock options (“NSOs”), non-vested stock,
non-vested stock units, stock appreciation rights (“SARs”),
performance units and to make stock-based awards
$ 145,664 $ 131,307
to full and part-time employees of the Company and its
7. Employee Stock-Based Compensation
and Benefit Plans
Plans
The Company’s stock-based compensation program is a
broad based, long-term retention program that is intended
to attract and reward talented employees and align
stockholder and employee interests. As of December 31,
2006, the Company had two stock-based compensation
plans under which it was granting stock options, shares
of non-vested stock and non-vested stock units. The
Company is currently granting stock-based awards from
its 2005 Equity Incentive Plan (as amended, the “2005
Plan”) and 2005 Employee Stock Purchase Plan (the “2005
ESPP”). Upon certain of the Company’s acquisitions, it
assumed several plans from the acquired companies. The
Company’s Board of Directors has provided that no new
awards will be granted under the Company’s acquired
subsidiaries or affiliates, where legally eligible to participate,
as well as consultants and non-employee directors of
the Company. Currently, the 2005 Plan provides for
the issuance of a maximum of 15,500,000 shares of
common stock of which 5,400,000 was authorized by
the Company’s Board of Directors in February 2006
and its stockholders in May 2006. On February 7, 2007,
subject to stockholder approval, the Board of Directors
approved a second amendment to the 2005 Plan (the
“Plan Amendment”) to (i) increase the aggregate number
of shares of Common Stock authorized for issuance under
the 2005 Plan by an additional 5,400,000 shares and
(ii) increase the aggregate number of shares of Common
Stock issuable pursuant to restricted stock, restricted stock
units, performance units or stock grants by an additional
1,000,000 shares of Common Stock. The Company is
requesting that the stockholders vote to approve the Plan
Amendment to increase the number of shares reserved
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notes to Consolidated Financial Statements
for issuance under the 2005 Plan by 5,400,000 shares
the fair market value of the Company’s common stock on
and to increase the number of shares issuable pursuant
the last business day of a Payment Period. Employees
to restricted stock, restricted stock units, performance
who, after exercising their rights to purchase shares of
units or stock grants by 1,000,000 shares. Under the 2005
common stock under the 2005 ESPP, would own shares of
Plan, ISOs must be granted at exercise prices no less
5% or more of the voting power of the Company’s common
than fair market value on the date of grant, except for ISOs
stock, are ineligible to participate under the 2005 ESPP.
granted to employees who own more than 10% of the
The 2005 ESPP provides for the issuance of a maximum of
Company’s combined voting power, for which the exercise
10,000,000 shares of common stock. As of December 31,
prices must be no less than 110% of the market value at
2006, 338,715 shares had been issued under the
the date of grant. NSOs and SARs must be granted at
2005 ESPP.
no less than market value on the date of grant, or in the
case of SARs in tandem with options, at the exercise price
of the related option. Non-vested stock awards may be
granted for such consideration in cash, other property
or services, or a combination thereof, as determined by
the Company’s Compensation Committee of its Board of
Directors. All stock-based awards are exercisable upon
vesting. As of December 31, 2006, there were 35,234,053
shares of common stock reserved for issuance pursuant to
the Company’s stock-based compensation plans and the
Company had authorization under its 2005 Plan to grant
Adoption of SFAS No. 123R and Transition
As a result of adopting SFAS No. 123R on January 1,
2006, the Company’s income before income taxes and
net income for 2006 are $44.9 million and $33.8 million
lower, respectively, than if the Company had continued to
account for stock-based compensation under APB Opinion
No. 25. The Company’s basic and diluted earnings per
share for 2006 are $0.19 and $0.18, respectively lower than
if the Company had continued to account for stock-based
compensation under APB Opinion No. 25.
8,109,970 additional stock-based awards.
Prior to the adoption of SFAS No. 123R, the Company
The 2005 ESPP was originally adopted by the Company’s
Board of Directors and approved by the Company’s
stockholders in 2005. The 2005 ESPP replaced the
Company’s 1995 ESPP under which no more shares
may be granted. Under the 2005 ESPP, all full-time and
certain part-time employees of the Company are eligible
to receive options to purchase common stock of the
Company twice per year at the end of a six month payment
period (a “Payment Period”). During each Payment Period,
eligible employees who so elect may authorize payroll
deductions in an amount no less than 1% nor greater than
10% of his or her base pay for each payroll period in the
Payment Period. At the end of each Payment Period, the
accumulated deductions are used to purchase shares of
common stock from the Company up to a maximum of
12,000 shares for any one employee during a Payment
Period. Shares are purchased at a price equal to 85% of
presented all tax benefits from deductions resulting from
the exercise of stock options as operating cash flows in its
statement of cash flows. SFAS No. 123R requires that the
portion of benefits resulting from tax deductions in excess
of recognized compensation (the “excess tax benefits”) be
presented as financing cash flows. The excess tax benefits
were approximately $51.9 million, for 2006, and would
have been presented as an operating cash inflow prior to
the adoption SFAS No. 123R. In addition, the Company
previously presented deferred compensation as a separate
component of stockholders’ equity. Upon adoption, of
SFAS No. 123R, the Company reclassified the balance in
deferred compensation to additional paid-in capital on its
accompanying condensed consolidated balance sheet.
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Pro Forma Information Under SFAS No. 123 for Periods
Prior to January 1, 2006
The following table illustrates the effect on net earnings
and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-
based awards in 2005 and 2004 (in thousands, except per
share information):
Net income:
As reported
Add: Total stock-based employee compensation included in net income as reported,
net of related tax effects
Deduct: Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects
Pro forma
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
As reported
Pro forma
2005
(restated)
2004
(restated)
$ 165,609
$ 131,287
5,767
5,159
(38,475)
(47,002)
$ 132,901
$ 89,444
$
$
$
$
0.96
0.77
0.93
0.75
$
$
$
$
0.78
0.53
0.75
0.51
For purposes of the pro forma calculations, the fair value of
model, assuming no expected dividends, and the following
each option was estimated on the date of the grant using
assumptions:
the Black-Scholes option-pricing model, assuming no
expected dividends, and the following assumptions:
Stock Options
granted during
2005
2004
Expected volatility factor
0.38–0.49
Approximate risk free interest rate 3.7%-4.4% 3.0%-3.5%
3.32 – 4.76
Expected term (in years)
0.31–0.35
3.32
The Company estimated the expected volatility factor
based upon implied and historical data. The approximate
risk free interest rate was based on the implied yield
available on U.S. Treasury zero-coupon issues with
remaining terms equivalent to the Company’s expected
term. The expected term of the Company’s stock options
was based on the historical exercise patterns considering
changes in vesting periods and contractual terms. The
weighted average fair value of stock options granted during
2005 and 2004 was $9.18 and $7.37, respectively. The
total intrinsic value of stock options exercised during 2005
and 2004 was $62.9 million and $41.5 million, respectively.
Forfeitures were recognized as they occurred.
For purposes of the pro forma calculations, the fair value
of each stock-based award related to the 1995 ESPP
was estimated using the Black-Scholes option-pricing
Expected volatility factor
Approximate risk free
interest rate
Expected term
2005
2004
0.28–0.33
0.36-0.42
2.5%–3.4% 1.0%-1.6%
6 months
6 months
The Company estimated the expected volatility factor
based on historical data. The approximate risk free
interest rate was based on the implied yield available on
U.S. Treasury zero-coupon issues with remaining term
equivalent to the Company’s expected term. The expected
term for the 1995 ESPP is the six month Payment Period.
The weighted average fair value of the shares purchased
under the 1995 ESPP during 2005 and 2004 was $16.48
and $15.98, respectively.
Valuation and Expense Information under SFAS No. 123R
The Company recorded stock-based compensation costs
of $61.6 million and recognized a tax benefit related to
stock-based compensation of $57.1 million in 2006. As
required by SFAS No. 123R, the Company estimates
forfeitures of employee stock options and recognizes
compensation cost only for those awards expected to
vest. Forfeiture rates are determined based on historical
experience. Estimated forfeitures are adjusted to actual
forfeiture experience as needed.
Citrix Systems, Inc.
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notes to Consolidated Financial Statements
Total stock-based compensation and related deferred
implied volatility is more representative of future stock price
tax asset recognized in the Company’s consolidated
trends than historical volatility. The approximate risk free
statement of income in 2006 is $61.6 million and
interest rate was based on the implied yield available on
$9.6 million, respectively. The detail of the total stock-
U.S. Treasury zero-coupon issues with remaining terms
based compensation recognized by income statement
equivalent to the Company’s expected term on its options.
classification is as follows (in thousands):
The expected term of the Company’s stock options was
Income Statement Classifications
Cost of services revenues
Research and development
Sales, marketing and support
General and administrative
Total
2006
$
2,100
18,209
24,095
17,192
$ 61,596
In connection with the adoption of SFAS No. 123R, the
based on the historical employee exercise patterns. The
Company also analyzed its historical pattern of option
exercises based on certain demographic characteristics
and determined that there were no meaningful differences
in option exercise activity based on the demographic
characteristics. The Company does not intend to pay
dividends on its common stock in the foreseeable future.
Accordingly, the Company used a dividend yield of zero in
Company estimated the fair value of each stock option on
its option pricing model. The weighted average fair value of
the date of grant using the Black-Scholes option-pricing
stock options granted during 2006 was $10.90.
model, applying the following assumptions and amortizing
that value to expense over the option’s vesting period using
Stock Options
the ratable approach:
Stock Options granted
during 2006
Expected volatility factor
Approximate risk free interest rate
Expected term (in years)
Expected dividend yield
0.30-0.37
4.5%-4.9%
3.00-3.34
0%
As part of the Company’s 2006 Acquisitions, it assumed
186,642 options to purchase shares of its common stock,
of which options to purchase 120,940 shares of common
stock have a five year life and vest over three years at a
rate of 33.3% of the shares underlying the option one
year from date of grant and at a rate of 2.78% monthly
thereafter. The remaining options assumed in the 2006
Acquisitions vest based on service at varying rates through
For purposes of determining the expected volatility factor,
April of 2007. All other options granted during the year were
the Company considered implied volatility in two-year
granted pursuant to the Company’s 2005 Plan. Options
market-traded options of the Company’s common stock
granted pursuant to the 2005 Plan typically have a five
based on third party volatility quotes in accordance with
year life and vest over three years at a rate of 33.3% of the
the provisions of Staff Accounting Bulletin (“SAB”) No. 107.
shares underlying the option one year from date of grant
The Company’s decision to use implied volatility was
and at a rate of 2.78% monthly thereafter. A summary
based upon the availability of actively traded options on
of the status and activity of the Company’s fixed option
the Company’s common stock and its assessment that
awards is as follows:
Options
Outstanding at December 31, 2005
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2006
Vested or expected to vest at December 31, 2006
Exercisable at December 31, 2006
0
Weighted-
Average
Exercise
Price
$ 25.86
33.95
19.85
33.03
29.55
29.46
30.00
Number of
Options
34,305,837
5,162,497
(11,173,912)
(1,416,032)
26,878,390
24,801,668
18,502,912
Weighted-
Average
Remaining
Contractual
Life
4.79
Aggregate
Intrinsic Value
(in thousands)
3.74
3.70
3.54
$ 124,686
$ 120,301
$
98,798
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The total intrinsic value of stock options exercised during
second anniversary of the grant date, and the remaining
2006 was $180.0 million.
Non-vested Stock
As part of the Company’s 2005 Acquisitions, it assumed
25,179 shares of non-vested stock held by certain
employees of the acquired companies. The non-vested
stock assumed vests monthly based on service through
October 2007 dependent upon the remaining vesting
period of such non-vested stock at the time of the
acquisition. As part of an overall retention program, the
Company also granted 60,000 shares of non-vested stock
to certain employees retained from the 2005 Acquisitions.
Of the non-vested stock granted, 45,000 shares vest 50%
on the first anniversary of the grant date and 50% on the
15,000 non-vested shares granted vest 50% on the first
anniversary of the grant date and 50% eighteen months
from the grant date. In addition to the non-vested stock the
Company issued in conjunction with its 2005 Acquisitions,
in 2006, the Company awarded shares of non-vested stock
pursuant to the 2005 Plan to a certain senior member of
management that vests upon achieving certain employee
retention goals. If the retention goals are not achieved, no
shares will be awarded and no compensation cost will
be recognized and any previously recognized
compensation cost will be reversed. The following
table summarizes the Company’s non-vested stock
activity as of December 31, 2006:
Non-vested at December 31, 2005
Granted
Vested
Forfeited or expired
Non-vested at December 31, 2006
Weighted-
Average
Fair Value
at Grant
Date
$ 26.52
35.00
27.61
27.82
30.03
Number
of Shares
85,179
25,940
(63,195)
(8,000)
39,924
Non-vested Stock Units
on a straight line basis over the requisite service period
The Company assumed $2.8 million of non-vested
for the entire award. As part of the 2006 Acquisitions, the
stock units in conjunction with its 2005 Acquisitions.
Company assumed 175,717 non-vested stock units, of
The non-vested stock units vest 33.33% at nine, twelve
which the majority vest based on service at a rate of 50%
and eighteen months from the date of grant; however, if
on the first anniversary of the grant date and 50% on the
certain performance criteria are met, 33.33% of the non-
second anniversary of the grant date.
vested stock units will vest in fourteen months instead of
eighteen months. In accordance with the provisions of
SFAS No. 123R, the Company will accelerate the expense
recognition of these non-vested stock units when and if it is
determined that it is probable the performance criteria will
be achieved at the earlier date. The number of shares that
will be issued on each vesting date is dependent upon the
Company’s stock price over the five consecutive trading
days prior to the vesting date; provided, however that the
number of shares issued pursuant to the non-vested stock
units will not exceed 280,000 shares. The Company’s
policy is to recognize compensation cost for awards with
only service conditions and a graded vesting schedule
In addition, during 2006, the Company awarded certain
senior members of management non-vested stock units
from the 2005 Plan. The number of non-vested stock units
underlying each award is determined one year after the date
of the award based on achievement of a specific corporate
operating income goal. If the performance goal is less than
90% attained, then no non-vested stock units will be issued
pursuant to the authorized award. For performance at and
above 90%, the number of non-vested stock units issued
will be based on a graduated slope, with the maximum
number of non-vested stock units issuable pursuant to the
award capped at 125% of the base number of non-vested
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notes to Consolidated Financial Statements
stock units set forth in the executive’s award agreement. If
remaining terms similar to the expected term of the 2005
the performance goal is met, the non-vested stock units will
ESPP options. The approximate risk free interest rate
vest 33.33% on each anniversary subsequent to the date
was based on the implied yield available on U.S. Treasury
of the award. Each non-vested stock unit, upon vesting, will
zero-coupon issues with remaining term equivalent to the
represent the right to receive one share of the Company’s
expected term of the 2005 ESPP options. The expected
common stock. If the performance goals are not met, no
term for the 2005 ESPP options is the six month Payment
compensation cost will be recognized and any previously
Period. The weighted average fair value of the shares
recognized compensation cost will be reversed. During
purchased under the 2005 ESPP during 2006 was $26.30.
the second quarter of 2006, the Company also awarded
non-vested stock units to its non-employee directors. These
units vest monthly in equal installments based on service
and, upon vesting, each stock unit will represent the right to
receive one share of the Company’s common stock.
Benefit Plan
The Company maintains a 401(k) benefit plan (the “Plan”)
allowing eligible U.S.-based employees to contribute
up to 60% of their annual compensation, limited to an
annual maximum amount as set periodically by the
The following table summarizes the Company’s non-
Internal Revenue Service. The Company, at its discretion,
vested stock unit activity with performance measures as of
may contribute up to $0.50 of each dollar of employee
December 31, 2006:
Weighted-
Average
Fair Value
at Grant
Date
Number
of Shares
Non-vested at December 31, 2005
Granted
Vested
Forfeited or expired
— $
323,256
(67,117)
(15,844)
Non-vested at December 31, 2006 240,295
—
34.41
34.52
32.08
34.54
As of December 31, 2006, there was $64.8 million of total
unrecognized compensation cost related to the stock
options, non-vested stock and non-vested stock units. That
cost is expected to be recognized over a weighted-average
period of 1.92 years.
2005 ESPP
The Company estimated the fair value of the stock-based
compensation related to the 2005 ESPP using the Black-
Scholes option pricing model, applying the following
assumptions and amortizing that value to expense over the
vesting period:
Expected volatility factor
Approximate risk free interest rate
Expected term
Expected dividend yield
2006
0.27 – 0.37
4.5% - 5.1%
6 months
0%
The Company estimated the expected volatility factor
based on implied volatility in market traded options with
contribution. The Company’s total matching contribution
to an employee is limited to a maximum of 6% of the
employee’s annual compensation. The Company’s
matching contributions were $3.7 million, $2.8 million and
$2.3 million in 2006, 2005 and 2004, respectively. The
Company’s contributions vest over a four-year period at
25% per year.
8. Capital Stock
Stock Repurchase Programs
The Company’s Board of Directors authorized an ongoing
stock repurchase program with a total repurchase
authority granted to the Company of $1.5 billion, of
which $200 million was authorized in February 2006
and $300 million was authorized in October 2006. The
Company may use the approved dollar authority to
repurchase stock at any time until the approved amounts
are exhausted. The objective of the Company’s stock
repurchase program is to improve stockholders’ returns.
At December 31, 2006, approximately $293.4 million was
available to repurchase common stock pursuant to the
stock repurchase program. All shares repurchased are
recorded as treasury stock.
The Company is authorized to make open market
purchases of its common stock using general corporate
funds. Additionally, during 2006, 2005 and 2004, the
Company entered into structured stock repurchase
arrangements with large financial institutions using general
corporate funds in order to lower the average cost to
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acquire shares. These programs include terms that
Preferred Stock
require the Company to make up-front payments to the
The Company is authorized to issue 5,000,000 shares of
counterparty financial institution and result in the receipt
preferred stock, $0.01 par value per share. The Company
of stock during and/or at the end of the period of the
has no present plans to issue such shares.
agreement or the receipt of either stock or cash at
the maturity of the agreement, depending on
market conditions.
9. Long-Term Debt
Credit Facility
The Company made prepayments to financial institutions,
net of premiums received, during 2006, 2005, and
2004 of approximately $114.4 million, $52.2 million and
$107.0 million, respectively. During 2006, 2005 and
2004, the Company expended approximately $159.8
million, $122.2 million and $14.9 million, respectively,
on open market purchases. Under its structured stock
repurchase agreements the Company took delivery of
4,307,112 shares, at an average price of $30.76, 2,302,217
shares at an average price of $22.02 and 3,585,740
shares, at an average price of $19.19 during 2006, 2005
and 2004, respectively. Due to the fact that the total
shares to be received under its structured repurchase
arrangements at December 31, 2006 is not determinable
until the contracts mature, the above price per share
amounts exclude the remaining shares to be received
subject to the agreements. As of December 31, 2006,
the Company has remaining prepaid notional amounts of
approximately $36.3 million remaining under structured
stock repurchase agreements, which expire in January
2007. The Company repurchased 5,193,410 shares of
outstanding common stock with an average price of
$30.77, repurchased 5,054,400 shares of outstanding
common stock with an average price of $24.18 and
repurchased 873,000 shares with an average price of
$17.06 during 2006, 2005 and 2004, respectively, in
its open market purchase transactions. In addition, a
significant portion of the funds used to repurchase stock
was funded by proceeds from employee stock option
exercises and the related tax benefits.
The Company suspended its stock repurchase program
for the duration of its Audit Committee’s voluntary,
independent review of the Company’s historical stock
option granting practices and related accounting. For more
information on the Audit Committee’s independent review
of historical stock option granting practices and related
Effective on August 9, 2005, the Company entered into
a revolving credit facility (the “Credit Facility”) with a
group of financial institutions (the “Lenders”). Effective
September 27, 2006, the Company entered into an
amendment and restatement of its Credit Facility (the
“Amendment”). The Amendment decreased the overall
range of interest rates the Company will pay on amounts
outstanding on the Credit Facility and lowered the facility
fee. In addition, the Amendment extended the term of the
Credit Facility. The Credit Facility, as amended, allows the
Company to increase the revolving credit commitment up
to a maximum aggregate revolving credit commitment of
$175.0 million. The Credit Facility, as amended, currently
provides for a revolving line of credit that will expire on
September 27, 2011 in the aggregate amount of $100.0
million, subject to continued covenant compliance. A
portion of the revolving line of credit (i) in the aggregate
amount of $25.0 million may be available for issuances of
letters of credit and (ii) in the aggregate amount of $15.0
million may be available for swing line loans. The Credit
Facility currently bears interest at LIBOR plus 0.32% and
adjusts in the range of 0.32% to 0.80% above LIBOR
based on the level of the Company’s total debt and its
adjusted earnings before interest, taxes, depreciation
and amortization (“EBITDA”) as defined in the agreement.
In addition, the Company is required to pay a quarterly
facility fee ranging from 0.08% to 0.20% based on the
aggregate amount available under the Credit Facility,
as amended, and the level of the Company’s total debt
and its adjusted EBITDA. Borrowings under the Credit
Facility, as amended, are guaranteed by the Company
and certain of the Company’s United States and foreign
subsidiaries, which guarantees are secured by a pledge
of shares of certain foreign subsidiaries. During 2005,
the Company borrowed and repaid $75.0 million under
the Credit Facility. As of December 31, 2006, there
were no amounts outstanding under the Credit Facility,
accounting see “Management’s Discussion and Analysis of
as amended.
Financial Condition and Results of Operations” elsewhere
in this Annual Report.
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notes to Consolidated Financial Statements
The Company’s credit facility agreement contains a
pay dividends (other than pursuant to the Dividend
number of affirmative and negative covenants. Because
Reinvestment Plan executed under the American Jobs
of delays in filing the Company’s Annual Report on Form
Creation Act), conduct certain mergers or acquisitions,
10-K for the year ended December 31, 2006, its Quarterly
make certain investments and loans, incur future
Report on Form 10-Q for the three months ended
indebtedness or liens, alter the Company’s capital structure
March 31, 2007 and its Quarterly Report on Form 10-Q
or sell stock or assets, subject to certain limits.
for the three months ended June 30, 2007, the Company
was at risk of breaching the affirmative covenants
requiring certain financial statements to be provided to
its lender within 90 days after the end of the Company’s
fiscal year and 45 days after the end of the Company’s
fiscal quarters. The Company received waivers related
to these covenant breaches to extend the due date of
such financial statements until September 30, 2007. The
Company has notified its Lenders that the Company will
provide such financial statements by the extension date.
Convertible Subordinated Debentures
In March 1999, the Company sold $850 million principal
amount at maturity of its zero coupon convertible
subordinated debentures (the “Debentures”) due
March 22, 2019, in a private placement. The Debentures
were priced with a yield to maturity of 5.25% and resulted
in net proceeds to the Company of approximately
$291.9 million, net of original issue discount and net
of debt issuance costs of approximately $9.6 million.
On March 22, 2004, the Company redeemed the
Term Loan
outstanding Debentures for approximately $355.7 million.
Effective on August 9, 2005, a subsidiary of the
The Company used the proceeds from its held-to-
Company entered into a term loan facility (the “Term
maturity investments that matured on March 22, 2004
Loan”) with the Lenders. The Term Loan provided for
and cash on hand to fund the redemption. At the date
an eighteen-month single-draw term loan facility in the
of redemption, the Company incurred a charge for the
aggregate amount of $100.0 million. The Term Loan
write-off of the remaining deferred debt issuance costs of
bore interest at a rate of LIBOR plus 0.5% and adjusted
approximately $7.2 million.
in the range of 0.5% to 1.25% above LIBOR based on
the level of the subsidiary’s total debt and its adjusted
EBITDA, as described in the agreement. Borrowings
under the Term Loan were guaranteed by the Company
and certain of its United States and foreign subsidiaries,
which guarantees were secured by a pledge of shares
of certain foreign subsidiaries. In addition, the Company
was required to pay a quarterly facility fee ranging from
0.125% to 0.25% based on the aggregate amount of the
Term Loan and the level of the Company’s total debt and
its adjusted EBITDA. The Term Loan was paid in full in
February 2006.
10. Fair Values of Financial Instruments
The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued
expenses approximate their fair value due to the short
maturity of these items. The Company’s investments
classified as available-for-sale securities, including
restricted investments, are carried at fair value on the
accompanying consolidated balance sheets based
primarily on quoted market prices for such financial
instruments. The carrying value of the Term Loan
approximated fair value due to its market rate of interest.
The aggregate fair value of the Company’s available-for-
Interest expense on the Company’s borrowings in 2006
sale investments was $440.1 million and $76.9 million at
was not material and interest expense incurred on its
December 31, 2006 and 2005, respectively.
long-term borrowings in 2005 was $1.7 million. The
Credit Facility, as amended, contains customary default
provisions, and the Company must comply with various
financial and non-financial covenants. The financial
covenants consist of a minimum interest coverage ratio
and a maximum consolidated leverage ratio. The primary
non-financial covenants limit the Company’s ability to
11. Commitments and Contingencies
Leases
The Company leases certain office space and equipment
under various operating leases. In addition to rent, the
leases require the Company to pay for taxes, insurance,
maintenance and other operating expenses. Certain of
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these leases contain stated escalation clauses while others
lease arrangements.
contain renewal options. The Company recognizes rent
expense on a straight-line basis over the term of the lease,
excluding renewal periods, unless renewal of the lease is
reasonably assured.
The initial term of the synthetic lease is seven years. Upon
approval by the lessor, the Company can renew the lease
twice for additional two-year periods. The lease payments
vary based on LIBOR plus a margin. At any time during the
Rental expense for the years ended December 31, 2006,
lease term, the Company has the option to sublease the
2005 and 2004 totaled approximately $24.9 million, $21.2
property and upon a thirty-day written notice, the Company
million and $18.0 million, respectively. Sublease income
has the option to purchase the property for an amount
for the years ended December 31, 2006, 2005 and 2004
representing the original property cost and transaction
was approximately $0.7 million, $0.8 million and $1.6
fees of approximately $61.0 million plus any lease breakage
million, respectively. Lease commitments under non-
costs and outstanding amounts owed. Upon at least 180
cancelable operating leases with initial or remaining terms
days notice prior to the termination of the initial lease term,
in excess of one year and sublease income associated
the Company has the option to remarket the property
with non-cancelable subleases, including estimated
for sale to a third party. If the Company chooses not to
future payments under the Company’s synthetic lease
purchase the property at the end of the lease term, it has
arrangement, are as follows:
guaranteed a residual value to the lessor of approximately
(In thousands)
Years ending December 31,
2007
2008
2009
2010
2011
Thereafter
Operating
Leases
Sublease
Income
$ 27,080
22,464
17,873
13,422
10,214
39,749
$ 130,802
$
780
813
832
301
96
585
$ 3,407
Off-Balance Sheet Arrangement
During 2002, the Company became a party to a synthetic
lease arrangement totaling approximately $61.0 million
for its corporate headquarters office space in Fort
Lauderdale, Florida. The synthetic lease represents a form
of off-balance sheet financing under which an unrelated
third party lessor funded 100% of the costs of acquiring
the property and leases the asset to the Company.
The synthetic lease qualifies as an operating lease for
accounting purposes and as a financing lease for tax
purposes. The Company does not include the property
or the related lease debt as an asset or a liability in its
consolidated balance sheets. Consequently, payments
made pursuant to the lease are recorded as operating
expenses in the Company’s consolidated statements of
income. The Company entered into the synthetic lease
in order to lease its headquarters properties under
more favorable terms than under its previous
$51.9 million and possession of the buildings will be
returned to the lessor. On a periodic basis, the Company
evaluates the property for indicators of impairment. If an
evaluation were to indicate that fair value of the property
had declined below $51.9 million, the Company would be
responsible for the difference under its residual
value guarantee, which could have a material adverse
effect on the Company’s results of operations and
financial condition.
The synthetic lease includes certain financial covenants
including a requirement for the Company to maintain a
pledged balance of approximately $62.8 million in cash
and/or investment securities as collateral. This amount is
included in restricted cash equivalents and investments
in the accompanying consolidated balance sheets. The
Company maintains the ability to manage the composition
of the restricted investments within certain limits and to
withdraw and use excess investment earnings from the
restricted collateral for operating purposes. Additionally, the
Company must maintain a minimum cash and investment
balance of $100.0 million, excluding the Company’s
collateralized investments, equity investments and
outstanding debt as of the end of each fiscal quarter. As
of December 31, 2006, the Company had approximately
$642.5 million in cash and investments in excess of this
required level. The synthetic lease includes non-financial
covenants, including the maintenance of the property
and adequate insurance, prompt delivery of financial
Citrix Systems, Inc.
2006 Annual Report
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notes to Consolidated Financial Statements
statements to the administrative agent of the lessor and
Office Leases
prompt payment of taxes associated with the property. As
During 2002 and 2001, the Company took actions to
of December 31, 2006, the Company was in compliance
consolidate certain of its offices, including the exit of certain
with all material provisions of the arrangement.
leased office space and the abandonment of certain
The Company’s synthetic lease contains a number of
affirmative and negative covenants. Because of delays
in filing the Company’s Annual Report on Form 10-K for
the year ended December 31, 2006, its Quarterly Report
on Form 10-Q for the three months ended March 31,
2007 and its Quarterly Report on Form 10-Q for the
three months ended June 30, 2007, the Company was
at risk of breaching the affirmative covenant requiring its
Annual Report on Form 10-K to be provided to the lessor
within 100 days after the end of its fiscal year end and its
Quarterly Reports on Form 10-Q within 55 days after the
end of its fiscal quarters. The Company received waivers
related to these covenant breaches to extend the due
date of its Annual Report on Form 10-K for the year ended
December 31, 2006, its Quarterly Report on Form 10-Q for
the three months ended March 31, 2007 and its Quarterly
Report on Form 10-Q for the three months ended June 30,
leasehold improvements. During the third quarter of 2006,
the Company entered into an agreement, which assigned
the operating lease and all remaining liabilities related to
one of the closed offices to a third party. Lease obligations
related to the remaining existing operating lease continues
to 2018 with a total remaining obligation at December 31,
2006 of approximately $8.9 million, of which $1.6 million
was accrued as of December 31, 2006, and is reflected in
accrued expenses and other liabilities in the accompanying
consolidated balance sheets. In calculating this accrual, the
Company made estimates, based on market information,
including the estimated vacancy periods and sublease
rates and opportunities. The Company periodically re-
evaluates its estimates and if actual circumstances prove
to be materially worse than management has estimated,
the total charges for these vacant facilities could be
significantly higher.
2007 until October 31, 2007. The Company provided such
Legal Matters
reports to its lessor on September 14, 2007.
In January 2003, the FASB issued FASB Interpretation
(“FIN”) No. 46, Consolidation of Variable Interest Entities,
which addresses the consolidation of variable interest
entities in which an enterprise absorbs a majority of
the entity’s expected losses, receives a majority of the
entity’s expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the
entity. In December 2003, the FASB issued FIN No. 46
(revised). FIN No. 46 (revised) was effective immediately
for certain disclosure requirements and variable interest
entities referred to as special-purpose entities for periods
ending after December 15, 2003 and for all types of
entities for financial statements for periods ending after
March 15, 2004. The Company determined that it was not
required to consolidate the lessor, the leased facility or the
related debt upon the adoption of FIN No. 46 (revised).
Accordingly, there was no impact on its financial position,
results of operations or cash flows from adoption. However,
if the lessor were to change its ownership of the property
or significantly change its ownership of other properties
that it currently holds, the Company could be required to
consolidate the entity, the leased facility and the debt in a
future period.
6
In 2006, the Company was sued in the United States
District Court for the Northern District of Ohio and in
the United States District Court for the Southern District
of Florida, in each case for alleged infringement of U.S.
patents by Citrix Online Division’s GoToMyPC service. The
complaints name Citrix Systems, Inc. and Citrix Online
LLC, a wholly-owned subsidiary of Citrix Systems, Inc.,
as defendants and seek unspecified damages and other
relief. In response, the Company filed answers denying that
GoToMyPC infringes these patents and alleging, among
other things, that the asserted claims of these patents
are invalid. In January 2007, a similar suit naming Citrix
Systems, Inc. was filed in the United States District Court
of the Eastern District of Texas, and the Company has
filed a response denying infringement and alleging that
the asserted patent is invalid. On November 2, 2006, the
court in the Northern District of Ohio held a hearing for the
purpose of construing disputed terms of the claims of the
patent-in-suit, and on March 13, 2007, the court issued a
claim construction ruling. On March 21, 2007, the Company
moved for leave to amend its answer in that case to assert
an affirmative defense and counterclaim of inequitable
conduct, which is a complete defense. On August 28,
2007, the court granted the Company’s motion. On April
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13 and May 2, 2007, the court in the Southern District
Florida, where they are currently pending. The complaints
of Florida held a hearing for the purpose of construing
in these actions assert, among other things, that certain
disputed terms of the claims of the patent-in-suit. The court
stock option grants made by the Company were dated
issued its claim construction ruling in that case June 5,
and accounted for inappropriately. As with the Sheet Metal
2007. In addition, the United States Patent and Trademark
Workers’ complaint, the complaints in the Ekas and Crouse
Office has decided to reexamine the patent at issue in the
actions seek the recovery of monetary damages and other
Southern District of Florida case. The Company believes
relief for damages allegedly caused to the Company. The
that it has meritorious defenses to the allegations made in
Company has moved to have all three cases consolidated.
each of the complaints and intends to vigorously defend
these lawsuits; however, it is unable to currently determine
the ultimate outcome of these matters or the potential
exposure to loss, if any.
On March 8, 2007, a purported stockholder derivative
action entitled Sheet Metal Workers Local 28 Pension
Fund v. Roger W. Roberts et al. (C.A. No. 07-60316),
was filed in the US District Court for the Southern
District of Florida against certain of the Company’s
current and former directors and officers, and against
the Company as a nominal defendant. The complaint
Neither the purported stockholder derivative actions nor
the demand letter described above seeks to recover
amounts from the Company.
In addition, the Company is a defendant in various matters
of litigation generally arising out of the normal course of
business. Although it is difficult to predict the ultimate
outcome of these cases, management believes, based on
discussions with counsel, that any ultimate outcome would
not materially affect the Company’s financial position,
results of operations or cash flows.
asserts, among other things, that certain stock option
Guarantees
grants made by the Company were dated and accounted
FIN No. 45, Guarantor’s Accounting and Disclosure
for inappropriately. The complaint seeks the recovery of
Requirements for Guarantees, Including Indirect
monetary damages and other relief for damage allegedly
Guarantees of Indebtedness of Others, requires certain
caused to the Company.
The Company also received a demand letter dated
March 15, 2007 from a purported stockholder with respect
to certain stock option grants made to its current and
former directors and officers during the years 1996 through
2003. That demand letter asserts, among other things, that
certain stock option grants made by the Company were
dated and accounted for inappropriately. The demand
letter seeks, among other things, the commencement by
the Company’s Board of Directors of an action against
its directors and officers from 1996 forward for alleged
breaches of fiduciary duties in connection with the granting
of the options.
In July 2007, two additional purported stockholder
guarantees to be recorded at fair value and requires a
guarantor to make disclosures, even when the likelihood
of making any payments under the guarantee is remote.
For those guarantees and indemnifications that do
not fall within the initial recognition and measurement
requirements of FIN No 45, the Company must continue to
monitor the conditions that are subject to the guarantees
and indemnifications, as required under existing generally
accepted accounting principles, to identify if a loss
has been incurred. If the Company determines that it
is probable that a loss has been incurred, any such
estimable loss would be recognized. The initial recognition
and measurement requirements do not apply to the
provisions contained in the majority of the Company’s
software license agreements that indemnify licensees
derivative actions entitled Ekas v. Citrix, et al. (Case No. 07-
of the Company’s software from damages and costs
16114-11) and Crouse v. Citrix, et al. (Case No. 07-16249-
resulting from claims alleging that the Company’s software
03) were filed in the Circuit Court for Broward County,
infringes the intellectual property rights of a third party.
Florida state court against certain of the Company’s
The Company has not made payments pursuant to these
current and former directors and officers, and against the
provisions. The Company has not identified any losses
Company as a nominal defendant. On August 14, 2007,
that are probable under these provisions and, accordingly,
notices of removal were filed in both cases removing the
the Company has not recorded a liability related to these
cases to the US District Court for the Southern District of
indemnification provisions.
Citrix Systems, Inc.
2006 Annual Report
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notes to Consolidated Financial Statements
Purchase Obligations
The significant components of the Company’s deferred tax
The Company has agreements with suppliers to purchase
assets and liabilities consisted of the following:
inventory and estimates that its non-cancelable obligations
under these agreements for the fiscal year ended
December 31, 2007 to be approximately $9.3 million.
(In thousands)
December 31,
2006
2005
(restated)
Contingent Liabilities Related to Internal Revenue Code
Section 409A
Because virtually all holders of stock options granted by
the Company were not involved in or aware of the incorrect
pricing of certain options, the Company has taken and
intends to take further actions to address certain adverse
tax consequences that may be incurred by the holders of
such incorrectly priced options. The primary adverse tax
consequence is that the re-measured options vesting after
Deferred tax assets:
Accruals and reserves
Depreciation and amortization
Tax credits
Net operating losses
Other
Stock option compensation
Valuation allowance
$ 12,363 $
3,856
36,077
52,756
5,869
17,199
(1,332)
9,838
—
30,268
70,530
1,184
16,415
(1,332)
December 31, 2004 subject the option holder to a penalty
Total deferred tax assets
126,788
126,903
tax under Section 409A of the IRC (and, as applicable,
similar excise taxes under state laws). As a result during
the first quarter of 2007, the Company has recorded
$2.5 million, net of income tax, in liabilities related to the
Deferred tax liabilities:
Acquired technology
Depreciation and amortization
Prepaid expenses
(27,572)
—
(4,830)
(29,154)
(265)
(4,590)
anticipated payment by the Company of payroll and excise
taxes on behalf of the Company’s employees for options
that were exercised during open tax years under the related
statutes. The Company expects to incur approximately
$0.9 million, net of income tax, in additional charges to
correct future adverse tax consequences under IRC
Section 409A related to future employee option exercises
of incorrectly priced options.
12. Income Taxes
The United States and foreign components of income
before income taxes are as follows:
Total deferred tax liabilities
(32,402)
(34,009)
Total net deferred tax assets $ 94,386 $ 92,894
SFAS No. 109, Accounting for Income Taxes, requires
a valuation allowance to reduce the deferred tax assets
reported if it is not more likely than not that some
portion or all of the deferred tax assets will be realized.
At December 31, 2006, the Company has recorded a
valuation allowance of approximately $1.3 million relating to
deferred tax assets for foreign tax credit carryovers.
During the years ended December 31, 2006, 2005, and
2004, the Company recognized tax benefits related to
(In thousands)
2006
2005
2004
the exercise of employee stock options in the amount of
United States
Foreign
Total
(restated)
(restated)
$ 65,363 $ 59,141 $ 28,920
135,416
$ 243,081 $ 224,354 $ 164,336
177,718
165,213
The components of the provision for income taxes are as
follows:
(In thousands)
2006
2005
2004
(restated)
(restated)
Current:
Federal
Foreign
State
Total current
Deferred
$ 46,073 $ 52,181 $ 23,763
8,974
2,511
35,248
(2,199)
16,118
5,217
73,516
(14,771)
14,176
4,186
64,435
(4,351)
Total provision
$ 60,084 $ 58,745 $ 33,049
8
$40.6 million, $35.0 million, and $16.5 million, respectively.
These benefits were recorded to additional paid-in capital.
At December 31, 2006, the Company does not have any
U.S. net operating loss carryforwards remaining that result
from stock options. The Company records the benefit of
the net operating loss carryforwards generated from the
exercise of employee stock options in the period that the
net operating loss carryforwards are utilized.
At December 31, 2006, the Company had $135.9 million of
remaining net operating loss carryforwards from acquisitions.
The utilization of these net operating loss carryforwards are
limited in any one year pursuant to Internal Revenue Code
Section 382 and begin to expire in 2021.
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At December 31, 2006, the Company had research and
the reduction of approximately $14.2 million in tax reserves
development tax credit carryforwards of approximately
related to the conclusion of an Internal Revenue Service
$16.1 million that expire beginning in 2009. The Company
examination for the 2001 tax year and the expiration of a
had foreign tax credit carryforwards of approximately
statute of limitations for the 2002 tax year partially offset
$19.1 million at December 31, 2006 that expire beginning
by an additional tax reserve of approximately $13.0 million
in 2010. Additionally, the Company has other general
related to uncertainties arising in 2006. The net effect of
business credits at December 31, 2006 of approximately
these contingencies, primarily relating to the taxability
$0.9 million that expire 2025.
A reconciliation of the Company’s effective tax rate to the
statutory federal rate is as follows:
of transactions between entities of the consolidated
Company, did not have a material impact on the
Company’s effective tax rate for 2006.
Federal statutory taxes
State income taxes, net
of federal tax benefit
Foreign operations
Permanent differences
Tax credits
American Jobs Creation
Act dividend
SFAS No.123R expense
Other
Change in valuation
allowance
Year Ended December 31,
2006
2005
2004
(restated)
35.0% 35.0%
(restated)
35.0%
3.8
(20.9)
5.4
(2.0)
—
3.4
—
—
4.4
(19.5)
2.2
(2.4)
6.9
—
(0.4)
4.5
(27.0)
5.0
—
—
—
3.1
—
(0.5)
24.7% 26.2%
20.1%
On October 22, 2004, the American Jobs Creation
Act (“AJCA”) was signed into law. The AJCA provides
for an 85% dividends received deduction on dividend
distributions of foreign earnings to a U.S. taxpayer, if
certain conditions are met. During the second quarter of
fiscal 2005, the Company completed its evaluation of the
effects of the repatriation provision of the AJCA, and the
Company’s Chief Executive Officer and Board of Directors
approved its DRP under the AJCA. On September 27,
2005, the Company repatriated approximately $503
million of certain foreign earnings, of which $500 million
qualified for the 85% dividends received deduction. During
2005, the Company recorded an estimated tax provision
of approximately $24.4 million related to the repatriation.
Additionally, during 2005, the Company recorded the
reversal of approximately $8.8 million for income taxes on
The Company’s tax provision is based on expected
certain foreign earnings for which a deferred tax liability
income, statutory tax rates and tax planning opportunities
had been previously recorded. Other than the one-time
available in the various jurisdictions in which the Company
repatriation provision under the AJCA, the Company does
operates. In the ordinary course of global business, there
not expect to remit earnings from its foreign subsidiaries.
are transactions for which the ultimate tax outcome is
uncertain, thus judgment is required in determining the
worldwide provision for income taxes and the associated
realizability of deferred tax assets and liabilities. The
Company establishes reserves when it becomes probable
that a tax return position may be challenged and that
the Company may not succeed in completely defending
that challenge. The Company adjusts these reserves in
light of changing facts and circumstances, such as the
settlement of a tax audit. The Company’s annual tax rate
includes the impact of reserve provisions and changes
to reserves. While it is often difficult to predict the final
outcome or the timing of resolution of any particular tax
matter, the Company believes that its reserves reflect the
probable outcome of known tax contingencies. As such,
included in the Company’s effective tax rate for 2006 is
In July 2006, the FASB issued FASB Interpretation
(“FIN”) No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109.
FIN No. 48 prescribes a comprehensive model for
recognizing, measuring , presenting and disclosing in the
financial statements tax positions taken or expected to
be taken on a tax return. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006. If there are
changes in net assets as a result of application of FIN
No. 48 these will be accounted for as an adjustment to
retained earnings. The Company adopted FIN No. 48 on
January 1, 2007, as required. Upon adoption, the Company
recorded a cumulative adjustment to retained earnings of
approximately $12.4 million as a result of changes in net
assets that occurred due to the application of FIN No. 48 to
Citrix Systems, Inc.
2006 Annual Report
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notes to Consolidated Financial Statements
existing tax positions taken by the Company. As a result of
expenses directly attributable to the segment, including
the adoption of FIN No. 48, the Company believes that its
research and development costs in the Citrix Online
effective tax rate will be more volatile in future periods.
Division and excludes certain expenses that are managed
13. Geographic Information and Significant
Customers
The Company operates in a single industry segment
consisting of the design, development and marketing of
technology solutions that allow applications to be delivered,
supported and shared on-demand. The Company’s
revenues are derived from sales of its Application Delivery
Infrastructure products and related technical services in
the Americas, EMEA and Asia-Pacific regions and from
its online services sold by its Citrix Online Division. These
three geographic regions and the Citrix Online Division
constitute the Company’s four reportable segments.
outside the reportable segments. Costs excluded from
segment profit primarily consist of certain research and
development costs associated with the Company’s
application delivery infrastructure products, stock-based
compensation costs, amortization of core and product
technology, amortization of other intangible assets, interest,
corporate expenses and income taxes, as well as, charges
for in-process research and development. Corporate
expenses are comprised primarily of corporate marketing
costs, stock-based compensation costs, operations
and certain general and administrative expenses, which
are separately managed. Accounting policies of the
Company’s segments are the same as its consolidated
The Company does not engage in intercompany revenue
accounting policies.
transfers between segments. The Company’s chief
operating decision makers (“CODMs”) evaluate the
Company’s performance based primarily on profitability in
the geographic locations in which the Company operates
and separately evaluates the performance of its Citrix
Online Division. Segment profit for each segment includes
certain sales, marketing, general and administrative
International revenues (sales outside of the United States)
accounted for approximately 47.4%, 50.0% and 53.2%
of the Company’s net revenues for the year ended
December 31, 2006, 2005, and 2004, respectively. Net
revenues and segment profit for 2006, 2005 and 2004
classified by the Company’s reportable segments, are
presented below.
(In thousands)
Net revenues:
Americas (1)
EMEA (2)
Asia-Pacific
Online Services division
Consolidated
Segment profit (loss):
Americas
EMEA
Asia-Pacific
Online Services division
Unallocated expenses (3):
Amortization of intangibles
In-process research and development
Research and development
Net interest and other income
Other corporate expenses
2006
2005
2004
(restated)
(restated)
$
499,278
391,650
94,596
148,795
$ 397,233
334,900
77,492
99,097
$ 335,436
293,690
67,930
44,101
$ 1,134,319
$ 908,722
$ 741,157
$
252,996
253,956
31,887
36,084
$ 208,946
201,712
22,295
19,641
$ 199,332
174,277
19,587
(1,124)
(36,136)
(1,000)
(140,570)
39,737
(193,873)
(28,388)
(7,000)
(97,355)
20,682
(116,179)
(12,331)
(19,100)
(81,780)
5,369
(119,894)
Consolidated income before income taxes
$
243,081
$ 224,354
$ 164,336
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(1) The Americas segment is comprised of the United States,
follows. The revenue contributed by the distributor below is
Canada and Latin America.
(2) Defined as Europe, the Middle East and Africa.
(3) Represents expenses presented to management only on
a consolidated basis and not allocated to the geographic
operating segments.
Identifiable assets classified by the Company’s reportable
primarily recorded in the Americas segment.
Distributor A
Year Ended December 31,
2006
10%
2005
10 %
2004
11 %
segments are shown below. Long-lived assets consist of
In addition to evaluating the Company’s profitability by
property and equipment, net, and are shown below.
geography, including the Company’s Citrix Online Division,
December 31,
(In thousands)
2006
2005
(Restated)
Identifiable assets:
Americas
EMEA
Asia-Pacific
Online Services division
$ 1,549,050 $ 1,292,392
153,238
41,967
211,385
207,012
55,015
213,396
Total identifiable assets
$ 2,024,473 $ 1,698,982
December 31,
2006
2005
Long-lived assets, net:
United States
United Kingdom
Other foreign countries
$ 58,303
28,126
6,151
Total long-lived assets, net $ 92,580
$ 36,596
29,200
7,931
$ 73,727
The increase in identifiable assets in the Americas segment
is primarily due to an increase in short-term and long-
term investments and, to a lesser extent, the goodwill and
assets associated with the Company’s 2006 Acquisitions.
The increase in identifiable assets in the EMEA segment
is primarily due to an increase in short-term and long-
its CODMs also evaluate revenues by product groupings.
Accordingly, the following table presents revenues for
Product licenses, License updates and product related
Technical services by product grouping for the Company’s
Application Virtualization products, Application Networking
products and other products and Online services revenues
for the Citrix Online Division’s products, for the years ended:
December 31,
2006
2005
2004
$ 871,656 $ 776,793 $ 696,827
148,795
99,097
44,101
109,209
4,659
30,680
2,152
—
229
(In thousands)
Net revenues:
Application
Virtualization
revenues
Citrix Online
Division
revenues
Application
Networking
revenues
Other
Total net
revenue
$ 1,134,319 $ 908,722 $ 741,157
14. Derivative Financial Instruments
As of December 31, 2006 and 2005, the Company
term investments. See Note 4 for additional information
had $7.4 million and $3.2 million of derivative assets,
regarding the Company’s acquisitions.
Export revenue represents shipments of finished goods
and services from the United States to international
customers, primarily in Latin America and Canada.
Shipments from the United States to international
customers for 2006, 2005 and 2004 were $50.9 million,
$42.4 million and $32.9 million, respectively.
respectively, and $2.8 million and $8.3 million of derivative
liabilities, respectively, representing the fair values of the
Company’s outstanding derivative instruments, which are
recorded in other current assets, other assets, accrued
expenses and other liabilities in the accompanying
consolidated balance sheets. As of December 31, 2006,
the Company’s derivative assets and liabilities primarily
resulted from cash flow hedges related to its operating
There were no individual end-users that represented
expenses transacted in local currencies. The change in the
greater than 10% of net sales for any of the years
derivative component of accumulated other comprehensive
presented. The Company had net revenue attributed to
income (loss) includes unrealized gains or losses that arose
an individual distributor in excess of 10% of net sales as
from changes in market value of derivatives that were held
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notes to Consolidated Financial Statements
during the period, and gains or losses that were previously
comprehensive income (loss) or stockholders’ equity. The
unrealized, but have been recognized in current period
following table presents these components of accumulated
net income due to termination or maturities of derivative
other comprehensive income (loss), net of tax for the
contracts. This reclassification has no effect on total
Company’s derivative instruments (in thousands):
Unrealized gains on derivative instruments
Reclassification of realized gains
For the Year Ended December 31,
2006
2005
2004
$ 6,395
2,011
$ 10,230
1,255
$ 6,258
(6,422)
Net change in other comprehensive income due to derivative instruments
$ 8,406
$ 11,485
$
(164)
The total cumulative unrealized gain (loss) on derivative
of the instruments swap the fixed rate interest on the
instruments was $3.9 million and $(4.5) million at
underlying investments for a variable rate based on LIBOR
December 31, 2006 and 2005, respectively, and is included
plus a specified margin. Changes in the fair value of the
in accumulated other comprehensive income (loss) in the
swap instruments are recorded in earnings along with
accompanying consolidated balance sheets.
related designated changes in the value of the underlying
Cash Flow Hedges. At December 31, 2006 and 2005,
the Company had in place foreign currency forward sale
contracts with a notional amount of $56.0 million and $81.7
million, respectively, and foreign currency forward purchase
contracts with a notional amount of $220.0 million and
$191.5 million, respectively. The fair value of these contracts
at December 31, 2006 and 2005 were assets of $7.4 million
investments. During 2005, the Company sold underlying
fixed rate available-for-sale investments with a notional
value of $193.9 million. The Company held no remaining
interest rate swap instruments as of December 31, 2006
and 2005. There was no material ineffectiveness of the
Company’s interest rate swaps for the period that they
were held during 2005.
and $3.2 million, respectively and liabilities of $2.8 million
Derivatives not Designated as Hedges. From time to
and $8.3 million, respectively. A substantial portion of
time, the Company utilizes certain derivative instruments
the Company’s overseas expenses are and will continue
that either do not qualify or are not designated for hedge
to be transacted in local currencies. To protect against
accounting treatment under SFAS No. 133, Accounting
fluctuations in operating expenses and the volatility of
for Derivative Instruments and Hedging Activities, and
future cash flows caused by changes in currency exchange
its related interpretations. Accordingly, changes in the
rates, the Company has established a program that uses
fair value of these contracts, if any, are recorded in other
foreign exchange forward contracts to hedge its exposure
(expense) income, net.
to these potential changes. The terms of these instruments,
and the hedged transactions to which they relate, generally
do not exceed 12 months. Currencies hedged are euros,
British pounds sterling, Australian dollars, Swiss francs,
Japanese yen, Hong Kong dollars, Canadian dollars,
Danish krone and Swedish krona. There was no material
ineffectiveness of the Company’s foreign currency forward
contracts for 2006, 2005 or 2004.
During 2005, the Company was a party to three credit
default contracts that had an aggregate notional amount of
$75.0 million. The Company terminated these contracts in
the third quarter of 2005. The purpose of the credit default
contracts was to provide additional yield on certain of
the Company’s underlying available-for-sale investments.
Under the terms of these contracts, the Company had
assumed the default risk, above a certain threshold, of
Fair Value Hedges. From time to time, the Company
a portfolio of specified referenced issuers in exchange
uses interest rate swap instruments to hedge against
for a fixed yield that was recorded in interest income.
the changes in fair value of certain of its available-for-
In the event of default by underlying referenced issuers
sale securities due to changes in interest rates. Each
above specified amounts, the Company would have paid
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the counterparty an amount equivalent to its loss, not to
Company realized a net gain of $0.4 million in 2005, which
exceed the notional value of the contract. The primary risk
is included in other (expense) income, net.
associated with these contracts was the default risk of the
underlying issuers. The risk levels of these instruments
were equivalent to “AAA,” or better single securities. As a
result of the termination of the credit default contracts, the
15. Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
(In thousands, except per share information)
Numerator:
Net income
Denominator:
Year Ended December 31,
2006
2005
2004
(restated)
(restated)
$ 182,997
$ 165,609
$ 131,287
Denominator for basic earnings per share — weighted average shares
180,992
172,221
168,868
Effect of dilutive securities:
Employee stock awards
Contingent consideration related to acquisition
Denominator for diluted earnings per share — adjusted weighted-average
shares
Basic earnings per share
Diluted earnings per share
Antidilutive weighted average shares
6,733
—
5,550
—
5,284
222
187,725
177,771
174,374
$
$
1.01
0.97
$
$
0.96
0.93
$
$
0.78
0.75
17,892
26,134
29,245
16. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair
November 15, 2006, with earlier adoption encouraged. The
primary concepts set forth in SAB No. 108 are as follows:
Value Measurements, which defines fair value, establishes
(a) registrants should quantify errors using both the “rollover”
guidelines for measuring fair value and expands disclosures
approach (current year statement of operations effect) and
regarding fair value measurements. SFAS No. 157 does
“iron curtain” approach (year end balance sheet effect) and
not require any new fair value measurements but rather
evaluate whether either approach results in quantifying
eliminates inconsistencies in guidance found in various
a misstatement that, when all relevant quantitative
prior accounting pronouncements. SFAS No. 157 is
and qualitative factors are considered, is material; (b) if
effective for fiscal years beginning after November 15,
correcting an item in the current year materially affects the
2007. Earlier adoption is permitted, provided the company
current year but the item was not material in any prior years,
has not yet issued financial statements, including for interim
the prior year financial statements should be corrected,
periods, for that fiscal year. The Company is currently
even though such revision previously was and continues
evaluating the impact of SFAS No. 157, but does not expect
to be immaterial to the prior year financial statements;
that the adoption of SFAS No. 157 will have a material
however, in this circumstance, the correction can be made
impact on the Company’s consolidated financial position,
the next time the prior year financial statements are filed;
results of operations or cash flows.
In September 2006, the Securities and Exchange
Commission (the “SEC”) issued SAB No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB
No. 108 is effective for fiscal years ending on or after
(c) for purposes of evaluating materiality under the “iron
curtain” approach, all uncorrected errors on the balance
sheet are presumed to be reversed into the statement
of operations in the current period even though some or
all of the uncorrected difference may relate to periods
prior to the latest statement of operations presented and,
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notes to Consolidated Financial Statements
therefore, would only impact opening accumulated earnings
adoption of SAB No. 108 did not have a material effect on
(deficit) or if the amount of the uncorrected difference(s) is
the Company’s consolidated financial position, results of
determined to be material to the current period statement of
operations or cash flows.
operations, then such amount would be deemed material
and would have to be corrected for in the manner set forth
above. SAB No. 108 provides for the following transition
guidance in the initial period of adoption: (a) restatement of
prior years is not required if the registrant properly applied
its previous approach, either “rollover” or “iron curtain”
approach, so long as all relevant qualitative factors were
considered; (b) the SEC Staff will not object if a registrant
records a one-time cumulative effect adjustment to correct
errors existing in prior years that previously had been
considered immaterial, quantitatively and qualitatively,
based on the appropriate use of the registrant’s previous
approach; (c) if prior years are not restated, the cumulative
effect adjustment is recorded in opening accumulated
In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities.
SFAS No. No. 159 permits companies to choose to measure
certain financial instruments and certain other items at fair
value. The standard requires that unrealized gains and losses
on items for which the fair value option has been elected
be reported in earnings. SFAS No. 159 is effective for the
Company beginning in the first quarter of fiscal year 2008,
although earlier adoption is permitted. The Company is
currently evaluating the impact that SFAS No. 159 will have
on its consolidated financial statements, if any.
17. Quarterly Results (unaudited)
Quarterly results for the years ended December 31, 2006
earnings (deficit) as of the beginning of the fiscal year of
and 2005 follow (in thousands, except per share amounts):
adoption (e.g. January 1, 2006 for the Company). The
(In thousands, except per share amounts)
2006
Net revenues
Gross margin
Income from operations
Net income
Basic earnings per common share
Diluted earnings per common share
(In thousands, except per share amounts)
2005
Net revenues
Gross margin
Income from operations
Net income
Basic earnings per common share
Diluted earnings per common share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total Year
(restated)
(restated)
(restated)
$ 259,998
237,869
48,974
41,463
0.23
0.22
$ 275,468
251,227
49,341
44,971
0.25
0.23
$ 277,851
253,507
45,067
43,660
0.24
0.23
$ 321,002
293,018
59,962
52,903
0.29
0.29
$ 1,134,319
1,035,621
203,344
182,997
1.01
0.97
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total Year
(restated)
(restated)
(restated)
(restated)
(restated)
$ 201,890
192,646
42,361
37,515
0.22
0.21
$ 211,229
199,829
51,744
29,616
0.17
0.17
$ 226,947
211,002
43,778
40,153
0.23
0.23
$ 268,656
247,146
65,789
58,325
0.33
0.32
$
908,722
850,623
203,672
165,609
0.96
0.93
The sum of the quarterly earnings per share amounts do not add to the annual earnings per share amount due to the weighting of
common and common equivalent shares outstanding during each of the respective periods.
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The following tables reflect the adjustments related to the restatements for interim periods not derived from the audited
consolidated financial statements (dollars in thousands, except per share amounts):
Three Months Ended March 31, 2006
Three Months Ended March 31, 2005
As
Reported
Adjustments
As
Restated
As
Reported
Adjustments
As
Restated
$ 114,185
93,871
31,638
20,304
259,998
$
— $ 114,185
93,871
—
31,638
—
20,304
—
$ 90,062
77,175
20,365
14,288
$
— $
—
—
—
90,062
77,175
20,365
14,288
—
259,998
201,890
— 201,890
6,631
10,390
5,001
22,022
237,976
33,660
108,937
38,618
4,032
185,247
52,729
7,602
(438)
(708)
59,185
14,506
—
107
—
107
6,631
10,497
5,001
22,129
1,368
4,515
3,318
9,201
—
43
—
43
1,368
4,558
3,318
9,244
(107)
237,869
192,689
(43)
192,646
1,025
1,090
1,533
34,685
110,027
40,151
25,065
94,394
27,411
—
4,032
2,177
3,648
(3,755)
—
(62)
5
(3,812)
(596)
188,895
149,047
48,974
7,602
(500)
(703)
55,373
13,910
43,642
4,632
(8)
464
48,730
10,170
305
627
306
—
1,238
(1,281)
—
(49)
(59)
(1,389)
(344)
25,370
95,021
27,717
2,177
150,285
42,361
4,632
(57)
405
47,341
9,826
$ 44,679
$ (3,216) $ 41,463
$ 38,560
$ (1,045) $
37,515
Revenues:
Product licenses
License updates
Online services
Technical services
Total net revenues
Cost of revenues:
Cost of product license revenues
Cost of services revenues
Amortization of product
related intangibles
Total cost of revenues
Gross margin
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other
intangible assets
Total operating expenses
Income from operations
Interest income
Interest expense
Other (expense) income, net
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic
Diluted
$
$
0.25
0.24
$
$
(0.02) $
(0.02) $
0.23
0.22
$
$
0.23
0.22
$
$
(0.01) $
(0.01) $
0.22
0.21
Weighted average shares outstanding:
Basic
Diluted
178,169
186,013
—
(25)
178,169
185,988
170,139
175,913
—
(332)
170,139
175,581
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notes to Consolidated Financial Statements
Three Months Ended June 30, 2006
Three Months Ended June 30, 2005
As
Reported Adjustments
As
Restated
As
Reported
Adjustments
As
Restated
$ 117,799
99,750
35,128
22,791
275,468
$
— $ 117,799 $
—
—
—
99,750
35,128
22,791
91,980
80,455
23,844
14,950
—
275,468
211,229
—
119
—
119
8,116
11,540
4,585
24,241
2,277
5,395
3,693
11,365
$
— $
—
—
—
—
—
35
—
35
91,980
80,455
23,844
14,950
211,229
2,277
5,430
3,693
11,400
(119)
251,227
199,864
(35)
199,829
58
701
957
—
38,280
117,703
41,753
26,402
92,035
30,150
(706)
(994)
(1,016)
25,696
91,041
29,134
4,150
2,214
—
2,214
1,716
201,886
150,801
(2,716)
148,085
(1,835)
—
(62)
32
(1,865)
(386)
49,341
10,302
(135)
143
59,651
14,680
49,063
5,369
(16)
(370)
54,046
26,160
2,681
—
(49)
(47)
2,585
855
$ (1,479) $ 44,971 $
27,886
$ 1,730
51,744
5,369
(65)
(417)
56,631
27,015
29,616
0.17
0.17
$
$
$
0.25
0.24
$
— $
$ (0.01) $
0.25 $
0.23 $
0.16
0.16
$
$
0.01
0.01
8,116
11,421
4,585
24,122
251,346
38,222
117,002
40,796
4,150
200,170
51,176
10,302
(73)
111
61,516
15,066
46,450
$
$
$
183,023
191,500
—
(75)
183,023
191,425
169,698
175,146
—
(326)
169,698
174,820
Revenues:
Product licenses
License updates
Online services
Technical services
Total net revenues
Cost of revenues:
Cost of product license revenues
Cost of services revenues
Amortization of product
related intangibles
Total cost of revenues
Gross margin
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other intangible
assets
Total operating expenses
Income from operations
Interest income
Interest expense
Other income (expense), net
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average shares
outstanding:
Basic
Diluted
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Three Months September 30, 2006
Three Months Ended September 30, 2005
As
Reported Adjustments
As
Restated
As
Reported Adjustments
As
Restated
Revenues:
Product licenses
License updates
Online services
Technical services
Total net revenues
Cost of revenues:
Cost of product license revenues
Cost of services revenues
Amortization of product related
intangibles
Total cost of revenues
Gross margin
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other intangible
assets
In-process research and
development
Total operating expenses
Income from operations
Interest income
Interest expense
Other expense, net
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average shares
outstanding:
Basic
Diluted
— $ 97,262
84,511
—
26,163
—
19,011
—
— 226,947
—
29
—
29
4,828
6,640
4,477
15,945
$ 113,379
102,854
39,055
22,563
277,851
$
— $ 113,379
102,854
—
39,055
—
22,563
—
$ 97,262
84,511
26,163
19,011
—
277,851
226,947
$
8,201
11,320
4,657
24,178
253,673
39,432
118,027
42,957
4,360
1,000
205,776
47,897
12,525
(75)
(373)
59,974
13,356
46,618
$
$
$
—
166
—
166
8,201
11,486
4,657
24,344
4,828
6,611
4,477
15,916
(166)
253,507
211,031
(29)
211,002
672
877
1,115
40,104
118,904
44,072
27,540
96,632
31,919
208
496
282
27,748
97,128
32,201
4,360
3,147
—
3,147
—
—
1,000
7,000
2,664
208,440
166,238
(2,830)
—
(62)
—
(2,892)
66
45,067
12,525
(137)
(373)
57,082
13,422
44,793
6,742
(1,060)
(112)
50,363
9,410
$ (2,958) $ 43,660
$ 40,953
0.25
0.25
$ (0.01) $
$ (0.02) $
0.24
0.23
$
$
0.24
0.23
—
986
7,000
167,224
(1,015)
—
(49)
(19)
(1,083)
(283)
43,778
6,742
(1,109)
(131)
49,280
9,127
$
$
$
(800) $ 40,153
(0.01) $
— $
0.23
0.23
183,008
188,882
—
35
183,008
188,917
172,870
178,210
—
(231)
172,870
177,979
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notes to Consolidated Financial Statements
Three Months December 31, 2005
As
Reported
$ 130,131
88,961
28,725
20,839
268,656
5,931
10,273
5,278
21,482
247,174
29,680
110,359
36,058
4,084
—
180,181
66,993
6,871
(1,145)
—
(350)
72,369
13,428
58,941
0.33
0.32
176,104
182,769
$
$
$
Adjustments
$
—
—
—
—
—
—
28
—
28
As
Restated
$ 130,131
88,961
28,725
20,839
268,656
5,931
10,301
5,278
21,510
(28)
247,146
257
604
315
—
—
1,176
(1,204)
—
(50)
—
(13)
(1,267)
(651)
(616)
—
—
—
(171)
$
$
$
29,937
110,963
36,373
4,084
—
181,357
65,789
6,871
(1,195)
—
(363)
71,102
12,777
58,325
0.33
0.32
176,104
182,598
$
$
$
Revenues:
Product licenses
License updates
Online services
Technical services
Total net revenues
Cost of revenues:
Cost of product license revenues
Cost of services revenues
Amortization of product related intangibles
Total cost of revenues
Gross margin
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other intangible assets
In-process research and development
Total operating expenses
Income from operations
Interest income
Interest expense
Write-off of deferred debt issuance costs
Other expense, net
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
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ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Current portion of deferred tax assets, net
Total current assets
Restricted cash equivalents and investments
Long-term investments
Property and equipment, net
Goodwill, net
Other intangible assets, net
Long-term portion of deferred tax assets, net
Other assets
Total assets
LIABILITIES AnD STOCkhOLDERS’ EQuITy
Current liabilities:
Accounts payable
Accrued expenses
Current portion of deferred revenues
Total current liabilities
Long-term portion of deferred revenues
Other liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock at $.01 par value: 5,000 shares authorized
Common stock at $.001 par value: 1,000,000 shares authorized
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less — common stock in treasury, at cost
Total stockholders’ equity
As
Reported
March 31, 2006
Adjustments
As
Restated
$
423,192
157,073
116,418
3,954
34,462
46,363
781,462
63,737
95,439
76,293
591,593
129,196
30,461
8,678
$
—
—
—
—
—
1,357
1,357
—
—
—
—
—
14,635
—
$
423,192
157,073
116,418
3,954
34,462
47,720
782,819
63,737
95,439
76,293
591,593
129,196
45,096
8,678
$ 1,776,859
$
15,992
$ 1,792,851
$
35,297
119,681
274,192
429,170
18,260
1,352
$
—
7,884
—
7,884
—
—
$
35,297
127,565
274,192
437,054
18,260
1,352
—
231
1,287,706
989,305
(2,637)
2,274,605
(946,528)
1,328,077
—
—
132,241
(124,133)
—
8,108
—
8,108
—
231
1,419,947
865,172
(2,637)
2,282,713
(946,528)
1,336,185
$ 1,776,859
$
15,992
$ 1,792,851
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notes to Consolidated Financial Statements
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Current portion of deferred tax assets, net
Total current assets
Restricted cash equivalents and investments
Long-term investments
Property and equipment, net
Goodwill, net
Other intangible assets, net
Long-term portion of deferred tax assets, net
Other assets
Total assets
LIABILITIES AnD STOCkhOLDERS’ EQuITy
Current liabilities:
Accounts payable
Accrued expenses
Current portion of deferred revenues
Total current liabilities
Long-term portion of deferred revenues
Long-term debt
Other liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock at $.01 par value
Common stock at $.001 par value
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Less — common stock in treasury, at cost
Total stockholders’ equity
110
June 30, 2006
As
Reported
Adjustments
As
Restated
$
344,589
276,244
136,175
4,817
54,275
46,631
862,731
63,779
214,892
81,314
598,892
128,167
33,248
8,910
$
— $
—
—
—
—
1,833
1,833
—
—
—
—
—
11,801
—
344,589
276,244
136,175
4,817
54,275
48,464
864,564
63,779
214,892
81,314
598,892
128,167
45,049
8,910
$ 1,991,933
$
13,634 $ 2,005,567
$
38,252
122,111
290,097
450,460
20,628
—
1,379
—
236
1,448,662
1,035,755
2,312
2,486,965
(967,499)
1,519,466
$
— $
9,775
—
9,775
—
—
—
38,252
131,886
290,097
460,235
20,628
—
1,379
—
—
129,471
(125,612)
—
3,859
—
3,859
—
236
1,578,133
910,143
2,312
2,490,824
(967,499)
1,523,325
$ 1,991,933
$
13,634 $ 2,005,567
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ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Current portion of deferred tax assets, net
Total current assets
Restricted cash equivalents and investments
Long-term investments
Property and equipment, net
Goodwill, net
Other intangible assets, net
Long-term portion of deferred tax assets, net
Other assets
September 30, 2006
As
Reported
Adjustments
As
Restated
$
216,539
240,598
149,343
5,415
43,055
46,649
701,599
63,786
279,198
86,821
636,962
136,802
42,470
9,209
$
—
—
—
—
—
1,924
1,924
—
—
—
—
—
11,177
—
$
216,539
240,598
149,343
5,415
43,055
48,573
703,523
63,786
279,198
86,821
636,962
136,802
53,647
9,209
Total assets
$ 1,956,847
$
13,101
$ 1,969,948
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Current portion of deferred revenues
Total current liabilities
Long-term portion of deferred revenues
Other liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock at $.01 par value: 5,000 shares authorized
Common stock at $.001 par value: 1,000,000 shares authorized
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Less — common stock in treasury, at cost
Total stockholders’ equity
$
38,917
121,727
293,212
453,856
21,250
7,234
$
—
10,475
—
10,475
—
—
$
38,917
132,202
293,212
464,331
21,250
7,234
—
237
1,487,958
1,082,373
1,145
2,571,713
(1,097,206)
1,474,507
—
—
131,196
(128,570)
—
2,626
—
2,626
—
237
1,619,154
953,803
1,145
2,574,339
(1,097,206)
1,477,133
$ 1,956,847
$
13,101
$ 1,969,948
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notes to Consolidated Financial Statements
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Prepaid expenses and other current assets
Current portion of deferred tax assets, net
Total current assets
Restricted cash equivalents and investments
Long-term investments
Property and equipment, net
Goodwill, net
Other intangible assets, net
Long-term portion of deferred tax assets, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Current portion of deferred revenues
Total current liabilities
Long-term portion of deferred revenues
Other liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock at $.01 par value: 5,000 shares authorized
Common stock at $.001 par value: 1,000,000 shares authorized
Additional paid-in capital
Deferred compensation
Retained earnings
Accumulated other comprehensive income
Less — common stock in treasury, at cost
Total stockholders’ equity
As
Reported
March 31, 2005
Adjustments
As
Restated
$
120,947
189,691
85,459
32,105
44,113
472,315
147,176
147,385
68,235
361,783
82,013
—
11,318
$
—
—
—
—
1,944
1,944
—
—
—
—
—
18,442
—
$
120,947
189,691
85,459
32,105
46,057
474,259
147,176
147,385
68,235
361,783
82,013
18,442
11,318
$ 1,290,225
$
20,386
$ 1,310,611
$
15,196
104,841
216,422
336,459
13,561
4,540
$
—
8,698
—
8,698
—
—
$
15,196
113,539
216,422
345,157
13,561
4,540
—
214
907,533
(960)
816,846
2,795
1,726,428
(790,763)
935,665
—
—
137,854
(4,935)
(121,231)
—
11,688
—
11,688
—
214
1,045,387
(5,895)
695,615
2,795
1,738,116
(790,763)
947,353
$ 1,290,225
$
20,386
$ 1,310,611
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ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Prepaid expenses and other current assets
Current portion of deferred tax assets, net
Total current assets
Restricted cash equivalents and investments
Long-term investments
Property and equipment, net
Goodwill, net
Other intangible assets, net
Long-term portion of deferred tax assets, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Income taxes payable
Current portion of deferred revenues
Total current liabilities
Long-term portion of deferred revenues
Other liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock at $.01 par value: 5,000 shares authorized
Common stock at $.001 par value: 1,000,000 shares authorized
Additional paid-in capital
Deferred compensation
Retained earnings
Accumulated other comprehensive loss
Less — common stock in treasury, at cost
Total stockholders’ equity
As
Reported
June 30, 2005
Adjustments
As
Restated
$
207,673
183,278
98,861
33,881
41,762
565,455
145,639
148,265
69,389
361,783
77,370
5,952
9,882
$
—
—
—
—
876
876
—
—
—
—
—
18,175
—
$
207,673
183,278
98,861
33,881
42,638
566,331
145,639
148,265
69,389
361,783
77,370
24,127
9,882
$ 1,383,735
$
19,051
$ 1,402,786
$
17,389
110,636
22,095
227,690
377,810
14,981
1,677
$
—
5,272
—
—
5,272
—
—
$
17,389
115,908
22,095
227,690
383,082
14,981
1,677
—
216
950,498
(840)
844,732
(2,899)
1,791,707
(802,440)
989,267
—
—
137,323
(4,043)
(119,501)
—
13,779
—
13,779
—
216
1,087,821
(4,883)
725,231
(2,899)
1,805,486
(802,440)
1,003,046
$ 1,383,735
$
19,051
$ 1,402,786
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notes to Consolidated Financial Statements
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses and other current assets
Current portion of deferred tax assets, net
Total current assets
Restricted cash equivalents and investments
Long-term investments
Property and equipment, net
Goodwill, net
Other intangible assets, net
Long-term portion of deferred tax assets, net
Other assets
September 30, 2005
As
Reported
Adjustments
As
Restated
$
508,231
111,130
33,214
43,079
695,654
63,742
51,347
70,061
572,089
140,369
12,047
7,628
$
—
—
—
969
969
—
—
—
—
—
17,731
—
$
508,231
111,130
33,214
44,048
696,623
63,742
51,347
70,061
572,089
140,369
29,778
7,628
Total assets
$ 1,612,937
$
18,700
$ 1,631,637
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Income taxes payable
Current portion of deferred revenues
Total current liabilities
Long-term portion of deferred revenues
Long-term debt
Other liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock at $.01 par value: 5,000 shares authorized
Common stock at $.001 par value: 1,000,000 shares
authorized
Additional paid-in capital
Deferred compensation
Retained earnings
Accumulated other comprehensive loss
Less — common stock in treasury, at cost
Total stockholders’ equity
$
17,791
119,065
23,199
239,271
399,326
16,223
75,000
1,328
$
—
5,651
—
—
5,651
—
—
—
$
17,791
124,716
23,199
239,271
404,977
16,223
75,000
1,328
—
—
—
224
1,144,651
(20,594)
885,685
(3,940)
2,006,026
(884,966)
1,121,060
—
136,605
(3,255)
(120,301)
—
224
1,281,256
(23,849)
765,384
(3,940)
13,049
2,019,075
—
(884,966)
13,049
1,134,109
$ 1,612,937
$
18,700
$ 1,631,637
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18. Subsequent Events
Subsequent to December 31, 2006, the Company failed
to file its Annual Report on Form 10-K for the year ended
December 31, 2006 with the SEC on a timely basis. As a
result, on March 15, 2007, the Nasdaq Listing Qualifications
Department notified the Company that it was not in
compliance with the requirements of Nasdaq Marketplace
Rule 4310(c)(14) and began delisting proceedings. In
addition, in 2007, the Company failed to file its Quarterly
Reports on Form 10-Q for the three months ended
March 31, 2007 and June 30, 2007 with the SEC on a
timely basis. After each occurrence, the Nasdaq Listing
Qualifications Department notified the Company that it was
not in compliance with Nasdaq’s listing requirements. In
later appealed the panel’s determination. On August 30,
2007, the Company received notification from Nasdaq that
the Company’s common stock will continue to be listed on
the Nasdaq Global Select Market pending a review by the
Nasdaq Listing and Hearing Review Council of the decision
of the Nasdaq Listing Qualifications Panel. On September
11, 2007, following the filing of the Company’s Annual
Report on Form 10-K for the year ended December 31,
2006 and its Quarterly Reports on Form 10-Q for the three
months ended March 31, 2007 and June 30, 2007, the
Company received notice from the Nasdaq Listing and
Hearing Review Council Compliance Department that the
Company had demonstrated compliance with all the of the
Nasdaq Marketplace Rules and that the delisting process
accordance with Nasdaq rules, the Company requested a
was closed.
hearing with the Nasdaq Listing Qualifications Panel and
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Price Range of Common Stock and Dividend Policy
Market was $36.06 per share. As of August 30, 2007,
Our common stock is currently traded on The Nasdaq
there were approximately 1,245 holders of record of
Global Select Market under the symbol “CTXS.” The
our common stock.
following table sets forth the high and low closing prices
for our common stock as reported on The Nasdaq Global
Select Market for the periods indicated, as adjusted to the
nearest cent. Such information reflects inter-dealer prices,
without retail markup, markdown or commission and may
not represent actual transactions.
We currently intend to retain any earnings for use in our
business, for investment in acquisitions and to repurchase
shares of our common stock. We have not paid any cash
dividends on our capital stock in the last two years and do
not currently anticipate paying any cash dividends on our
capital stock in the foreseeable future.
High
Low
Issuer Purchases of Equity Securities
Year Ended December 31, 2007:
Third quarter (through August 30, 2007) $ 37.65 $ 31.79
$ 34.61 $ 30.48
Second quarter
$ 33.06 $ 26.83
First quarter
Year Ended December 31, 2006:
Fourth quarter
Third quarter
Second quarter
First quarter
Year Ended December 31, 2005:
Fourth quarter
Third quarter
Second quarter
First quarter
$ 35.39 $ 26.82
$ 40.29 $ 28.00
$ 45.16 $ 34.61
$ 37.90 $ 29.24
$ 29.24 $ 23.80
$ 25.41 $ 21.40
$ 25.37 $ 21.34
$ 24.10 $ 21.07
On August 30, 2007, the last reported sale price of
our common stock on The Nasdaq Global Select
Our Board of Directors has authorized an ongoing stock
repurchase program with a total repurchase authority
granted to us of $1.5 billion, of which $200.0 million
was authorized in February 2006 and $300.0 million
was authorized in October 2006. Our stock repurchase
program was suspended during the pendency of our Audit
Committee’s stock option investigation. The objective of
the stock repurchase program is to improve stockholders’
returns. At December 31, 2006, approximately $293.4
million was available to repurchase common stock
pursuant to the stock repurchase program. All shares
repurchased are recorded as treasury stock.
The following table shows the monthly activity related
to our stock repurchase program for the quarter ended
December 31, 2006.
Total Number
of Shares
Purchased (1)
Average
Price Paid
per Share
Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
Approximate dollar
value of Shares that
may yet be
Purchased under the
Plans or Programs
(in thousands)
October 1, 2006 through October 31, 2006
November 1, 2006 through November 30, 2006
December 1, 2006 through December 31, 2006
1,383,072 $ 30.21(2)
2,167,096 $ 29.25(2)
—
—
$
1,383,072
2,167,096
— (3)
Total
3,550,168 $ 29.63(2)
3,550,168
$ 307,242
$ 293,444
$ 293,444
$ 293,444
(1) Represents shares received under our prepaid stock repurchase programs and shares acquired in open market purchases. We
expended a net amount of $91.9 million during the quarter ended December 31, 2006 for repurchases of our common stock. For more
information see Note 8 to our consolidated financial statements included elsewhere in this Annual Report.
(2) These amounts represent the cumulative average of the price paid per share for shares acquired in open market purchases and those
received under our prepaid stock repurchase programs, some of which extend over more than one fiscal period.
(3) We suspended our stock repurchase program for the duration of our Audit Committee’s voluntary, independent review of our
historical stock option granting practices and related accounting. For more information on our independent review of historical stock
option granting practices and related accounting see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
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Total Return To Stockholders
(Includes reinvestment of dividends)
ANNUAL RETURN PERCENTAGE
Years Ending
Dec03
71.75
28.69
49.52
27.49
Dec04
15.60
10.88
8.83
10.87
INDEXED RETURNS
Years Ending
Dec03
93.38
100.25
103.36
90.05
Dec04
107.94
111.16
112.49
99.84
Dec05
17.46
4.91
2.13
-1.75
Dec05
126.79
116.62
114.88
98.10
Dec02
-45.63
-22.10
-30.87
-29.37
Dec02
54.37
77.90
69.13
70.63
Dec06
-5.85
15.79
9.87
15.32
Dec06
119.37
135.04
126.22
113.12
Base
Period
Dec01
100
100
100
100
Company Name / Index
CITRIX SYSTEMS INC
S&P 500 INDEX
NASDAQ U.S. INDEX
PEER GROUP
Company Name / Index
CITRIX SYSTEMS INC
S&P 500 INDEX
NASDAQ U.S. INDEX
PEER GROUP
Peer Group consists of those companies with an SIC code of 7372.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
$150
$100
$50
$0
Dec01
Dec02
Dec03
Dec04
Dec05
Dec06
CITRIX SYSTEMS INC
S&P 500 INDEX
NASDAQ U.S. INDEX
PEER GROUP
Citrix Systems, Inc.
2006 Annual Report
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Earnings per Share
Operating Cash Flow
Corporate Information
Revenue
( millions)
$1,134
$909
$741
$0.97
$0.93
$0.75
( millions)
$329
$293
$265
‘04
‘05
‘06
‘04
‘05
‘06
‘04
‘05
‘06
Financial Highlights
(In thousands, except per share data)
2006
2005
2004
Year Ended December 31,
Net revenues
Cost of revenues:
Cost of license revenues
Cost of services revenues
Amortization of product related intangible assets
Total cost of revenues
$ 1,134,319
$ 908,722
$ 741,157
32,911
46,585
19,202
98,698
14,404
26,929
16,766
58,099
3,824
16,705
6,127
26,656
Gross margin
1,035,621
850,623
714,501
Operating expenses:
Research and development
Sales, marketing and support
General and administrative
Amortization of other intangible assets
In-process research and development
155,331
480,343
178,669
16,934
1,000
108,751
394,153
125,425
11,622
7,000
86,654
337,777
105,799
6,204
19,100
Total operating expenses
832,277
646,951
555,534
Income from operations
203,344
203,672
158,967
Other income (expense), net
39,737
20,682
12,588
Write-off of deferred debt issuance costs
–
–
(7,219)
Income before income taxes
243,081
224,354
164,336
Income taxes
Net income
60,084
58,745
33,049
$ 182,997
$ 165,609
$ 131,287
Earnings per common share - diluted
$
0.97
$
0.93
$
0.75
Weighted average shares outstanding - diluted
187,725
177,771
174,374
Citrix Systems, Inc. is the global leader and the most trusted name in application delivery infrastructure. More than 200,000
organizations worldwide rely on Citrix to deliver any application to users anywhere with the best performance, highest security
and lowest cost.
Citrix customers include 100% of the Fortune 100 companies and 98% of the Fortune Global 500, as well as hundreds of
thousands of small businesses and prosumers. Citrix has approximately 6,200 channel and alliance partners in more than
100 countries. Annual revenue in 2006 was $1.1 billion.
Learn more at www.citrix.com.
Corporate Headquarters
Ft. Lauderdale, FL, USA
EMEA Headquarters
Schaffhausen, Switzerland
India Development Center
Bangalore, India
Stockholder Information
Corporate Offi cers
Mark B. Templeton
President and Chief Executive Offi cer
Online Division Headquarters
Santa Barbara, CA, USA
Pacifi c Headquarters
Hong Kong, China
Sydney Development Center
Sydney, Australia
Silicon Valley Headquarters
Santa Clara, CA, USA
Latin America Headquarters
Coral Gables, FL, USA
UK Development Center
Chalfont, United Kingdom
Investor Relations
Citrix’s stock trades on the NASDAQ Global Select Market
under the ticker symbol CTXS.
John C. Burris
Senior Vice President, Worldwide Sales and Services
The Citrix Annual Report and Form 10-K are available
electronically at www.citrix.com/annualreport.
David R. Friedman
General Counsel and Senior Vice President,
Human Resources and Secretary
David J. Henshall
Senior Vice President and Chief Financial Offi cer
Wes R. Wasson
Corporate Vice President, Worldwide Marketing
Board of Directors
Thomas F. Bogan
Partner, Greylock Partners
Murray J. Demo
Executive Vice President and Chief Financial Offi cer,
Postini, Inc.
Stephen M. Dow
General Partner, Sevin Rosen Funds
Asiff Hirji
Senior Director, TPG Capital, L.P.
Gary E. Morin
Former Executive Vice President and
Chief Financial Offi cer, Lexmark International, Inc.
Godfrey R. Sullivan
Former President, Hyperion Solution Corp., a wholly owned
subsidiary of Oracle Corp.
Mark B. Templeton
President and Chief Executive Offi cer,
Citrix Systems, Inc.
For further information about Citrix, additional copies
of this report, Form 10-K, or other fi nancial information
without charge, contact:
Citrix Systems, Inc.
Attn: Investor Relations
851 West Cypress Creek Road
Fort Lauderdale, FL 33309
United States
Tel: +1 954 267 3000
Tel: +1 800 424 8749
www.citrix.com/investors
Transfer Agent and Registrar
Computershare Trust Company, N.A.
P.O. Box 43023
Providence, RI 02940-3023
Tel: +1 877 282 1168
www.computershare.com
Independent Registered Public Accountants
Ernst & Young LLP
1 Clearlake Centre, Suite 900
250 South Australian Ave
West Palm Beach, FL 33401
Annual Meeting of Stockholders
The Annual Meeting of Stockholders of Citrix Systems, Inc.
will be held on October 18, 2007 at 2:00 p.m.
1801 NW 49th Street
Ft. Lauderdale, FL 33309
United States
“Over the next decade, delivering applications to
people—wherever they work and play—will become a
defining issue for IT. Why? Because applications
are the language of business. Winners will be fl uent with
application delivery.
Others will lag behind, struggling with the
pace of change in an increasingly dynamic world.”
– Mark Templeton, President and CEO, Citrix Systems
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Citrix Systems, Inc. 851 West Cypress Creek Road Fort Lauderdale, FL 33309 USA www.citrix.com
2006 Annual Report