10-Q 1 g85602e10vq.htm CITRIX SYSTEMS, INC. FORM 10-Q CITRIX SYSTEMS, INC. FORM 10-Q
Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

       
(Mark One)    
     
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
     
    For the quarterly period ended September 30, 2003
     
    OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number 0-27084

CITRIX SYSTEMS, INC.

(Exact name of registrant as specified in its charter)
     
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  75-2275152
(IRS Employer Identification No.)
     
851W. Cypress Creek Road
Fort Lauderdale, Florida

(Address of Principal Executive Offices)
   
33309
(Zip Code)

(954) 267-3000
Registrant’s Telephone Number, Including Area Code

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x      No   o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   x      No   o

     As of November 5, 2003 there were 164,119,714 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.



 


PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SIGNATURE
SECOND AMENDED & RESTATED 2000 STOCK OPTION PLAN
RULE 13A-14(A)/ 15D-14(A) CERTIFICATION
RULE 13A-14(A)/ 15D-14(A) CERTIFICATION
CERTIFICATION PURSUANT SECTION 906


Table of Contents

CITRIX SYSTEMS, INC.

Form 10-Q
For the Quarterly Period Ended September 30, 2003

CONTENTS

                 
            Page
            Number
           
PART I:
  FINANCIAL INFORMATION        
 
               
Item 1
  Condensed Consolidated Financial Statements (Unaudited)        
 
               
 
  Condensed Consolidated Balance Sheets:
September 30, 2003 and December 31, 2002
    3
 
               
 
  Condensed Consolidated Statements of Income:
Three Months and Nine Months ended September 30, 2003 and 2002
    4
 
               
 
  Condensed Consolidated Statements of Cash Flows:        
 
  Nine Months ended September 30, 2003 and 2002     5  
 
               
 
  Notes to Condensed Consolidated Financial Statements     6  
 
               
Item 2
  Management’s Discussion and Analysis of Financial        
 
  Condition and Results of Operations     20  
 
               
Item 3
  Quantitative & Qualitative Disclosures About Market Risk     45  
 
               
Item 4
  Controls and Procedures     45  
 
               
PART II:
  OTHER INFORMATION        
 
               
Item 1
  Legal Proceedings     46  
 
               
Item 6
  Exhibits and Reports on Form 8-K     46  
 
               
Signature   47  

2


Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Citrix Systems, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)
                         
            September 30,   December 31,
            2003   2002
           
 
            (in thousands, except par value)
Assets
               
Current assets:
               
   
Cash and cash equivalents
  $ 264,469     $ 142,700  
   
Short-term investments
    250,608       77,213  
   
Accounts receivable, net of allowances of $9,539 and $16,538 at September 30, 2003 and December 31, 2002, respectively
    85,563       69,471  
   
Prepaid expenses and other current assets
    38,294       36,400  
   
Current portion of deferred tax assets
    52,396       49,515  
 
   
     
 
       
Total current assets
    691,330       375,299  
Long-term investments
    295,607       499,491  
Property and equipment, net
    66,927       76,534  
Goodwill, net
    152,364       152,364  
Other intangible assets, net
    22,404       30,849  
Long-term portion of deferred tax assets
    5,689       5,587  
Other assets
    9,495       21,407  
 
   
     
 
 
  $ 1,243,816     $ 1,161,531  
 
   
     
 
 
               
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
   
Accounts payable and accrued expenses
  $ 102,638     $ 92,926  
   
Current portion of deferred revenues
    133,768       95,963  
   
Convertible subordinated debentures
    346,876        
 
   
     
 
       
Total current liabilities
    583,282       188,889  
 
Long-term portion of deferred revenues
    10,797       8,028  
Convertible subordinated debentures
          333,549  
 
Commitments and Contingencies
               
 
Put warrants
          7,340  
Common stock subject to repurchase
          9,135  
 
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; 200,957 and 197,426 issued at September 30, 2003 and December 31, 2002, respectively
    201       197  
 
Additional paid-in capital
    667,043       595,959  
 
Retained earnings
    610,466       519,797  
 
Accumulated other comprehensive income
    4,483       3,833  
 
   
     
 
 
    1,282,193       1,119,786  
 
Less — common stock in treasury, at cost (37,478 and 29,290 shares at September 30, 2003 and December 31, 2002, respectively)
    (632,456 )     (505,196 )
 
   
     
 
     
Total stockholders’ equity
    649,737       614,590  
 
   
     
 
 
  $ 1,243,816     $ 1,161,531  
 
   
     
 

See accompanying notes.

3


Table of Contents

Citrix Systems, Inc.

Condensed Consolidated Statements of Income

(Unaudited)
                                       
          Three Months Ended   Nine Months Ended
          September 30,   September 30,
         
 
          2003   2002   2003   2002
         
 
 
 
              (in thousands, except per share information)
Revenues:
                               
 
Revenues
  $ 144,341     $ 118,898     $ 430,881     $ 364,582  
 
Other revenues
                      14,082  
 
   
     
     
     
 
     
Total net revenues
    144,341       118,898       430,881       378,664  
Cost of revenues (excluding amortization, presented separately below)
    5,350       4,375       15,117       13,885  
 
   
     
     
     
 
Gross margin
    138,991       114,523       415,764       364,779  
Operating expenses:
                               
 
Research and development
    15,656       17,146       47,025       53,054  
 
Sales, marketing and support
    61,331       56,291       183,592       178,902  
 
General and administrative
    20,420       21,072       64,464       65,649  
 
Amortization of intangible assets
    2,868       2,646       8,541       8,588  
 
   
     
     
     
 
     
Total operating expenses
    100,275       97,155       303,622       306,193  
 
   
     
     
     
 
Income from operations
    38,716       17,368       112,142       58,586  
Interest income
    5,302       7,068       15,477       21,261  
Interest expense
    (4,558 )     (4,303 )     (13,630 )     (13,523 )
Other income (expense), net
    277       (821 )     2,252       (2,379 )
 
   
     
     
     
 
Income before income taxes
    39,737       19,312       116,241       63,945  
Income taxes
    8,742       2,497       25,573       9,592  
 
   
     
     
     
 
Net income
  $ 30,995     $ 16,815     $ 90,668     $ 54,353  
 
   
     
     
     
 
 
                               
Earnings per common share:
                               
   
Basic earnings per share
  $ 0.19     $ 0.10     $ 0.55     $ 0.30  
 
   
     
     
     
 
   
Weighted average shares outstanding
    164,310       175,127       165,662       179,712  
 
   
     
     
     
 
 
                               
Earnings per common share-assuming dilution:
                               
   
Diluted earnings per share
  $ 0.18     $ 0.10     $ 0.53     $ 0.30  
 
   
     
     
     
 
   
Weighted average shares outstanding
    171,111       175,891       171,135       181,503  
 
   
     
     
     
 

See accompanying notes.

4


Table of Contents

Citrix Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)
                         
            Nine Months Ended
            September 30,
           
            2003   2002
           
 
            (in thousands)        
Operating Activities
               
Net income
  $ 90,668     $ 54,353  
Adjustments to reconcile net income to net cash provided by operating activities:
               
 
Amortization of intangible assets
    8,541       8,588  
 
Depreciation and amortization of property and equipment
    18,067       23,637  
 
Loss on abandonment of fixed assets
    277       966  
 
Realized (gains) losses and other-than-temporary decline in market value of investments
    (1,210 )     980  
 
Provision for doubtful accounts
    1,297       1,939  
 
Provision for product returns
    1,523       18,040  
 
Provision for inventory reserves
    295       946  
 
Tax benefit related to the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options
    16,695       22,082  
 
Accretion of original issue discount and amortization of financing cost
    13,598       13,423  
 
Gain on repurchase of convertible subordinated debentures
          (1,547 )
 
Other non-cash items
    (290 )      
 
   
     
 
       
Total adjustments to reconcile net income to net cash provided by operating activities
    58,793       89,054  
 
Changes in operating assets and liabilities:
               
     
Accounts receivable
    (18,912 )     (6,841 )
     
Prepaid expenses and other current assets
    8,886       1,097  
     
Other assets
    4,053       4,247  
     
Deferred tax assets
    (2,758 )     (5,010 )
     
Accounts payable and accrued expenses
    5,088       (19,973 )
     
Deferred revenues
    40,574       7,568  
 
   
     
 
       
Total changes in operating assets and liabilities
    36,931       (18,912 )
 
   
     
 
Net cash provided by operating activities
    186,392       124,495  
 
               
Investing Activities
               
Purchases of investments
    (112,992 )     (105,727 )
Proceeds from sales and maturities of investments
    146,056       156,717  
Purchases of property and equipment
    (6,976 )     (17,102 )
Cash paid for licensing agreements
    (1,358 )      
Cash paid for acquisitions
          (10,680 )
 
   
     
 
Net cash provided by investing activities
    24,730       23,208  
 
               
Financing Activities
               
Proceeds from issuance of common stock
    34,558       3,930  
Cash paid under stock repurchase programs
    (124,553 )     (148,034 )
Cash paid to repurchase convertible subordinated debentures
          (27,773 )
Proceeds from sale of put warrants
    655       2,057  
Other
    (13 )     (16 )
 
   
     
 
Net cash used in financing activities
    (89,353 )     (169,836 )
 
   
     
 
Change in cash and cash equivalents
    121,769       (22,133 )
Cash and cash equivalents at beginning of period
    142,700       139,693  
 
   
     
 
Cash and cash equivalents at end of period
  $ 264,469     $ 117,560  
 
   
     
 

See accompanying notes.

5


Table of Contents

Citrix Systems, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the unaudited condensed consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the consolidated financial statements and accompanying notes included in the Citrix Systems, Inc. (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2002.

     Certain reclassifications have been made for consistent presentation.

2. Significant Accounting Policies

     Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amount of such estimates, when known, will vary from these estimates.

     Revenue Recognition

     The Company markets and licenses software products primarily through value-added resellers, channel distributors, system integrators and independent software vendors, managed by the Company’s worldwide sales force. The Company also separately sells software maintenance and technical services, which includes product training, technical support and consulting services. The Company’s software licenses are generally perpetual, and are delivered by means of traditional packaged products and electronically.

     The Company’s packaged products are typically purchased by medium and small-sized businesses with a minimal number of locations. In these cases, the software license is delivered with the packaged product. Electronic license arrangements are used with more complex multi-server environments typically found in larger business enterprises that deploy the Company’s products on a department or enterprise-wide basis, which could require differences in product features and functionality at various customer locations. Once the Company receives a purchase order, the enterprise customer licenses are electronically delivered to the customer with “software activation keys” that enable the feature configuration ordered by the end-user. Software may be delivered indirectly by a channel distributor or directly by the Company pursuant to a purchase order.

6


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

     Revenue is recognized when it is earned. The Company’s revenue recognition policies are in compliance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2 (as amended by SOP 98-4 and SOP 98-9) and related interpretations, Software Revenue Recognition. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of the arrangement exists; delivery has occurred and the Company has no remaining obligations; the fee is fixed or determinable; and collectibility is probable. The Company defines these four criteria as follows:

    Persuasive evidence of the arrangement exists. The Company recognizes revenue on packaged product upon shipment to distributors and resellers. For packaged product sales, it is the Company’s customary practice to require a purchase order from distributors who have previously negotiated a master packaged product distribution or resale agreement. For enterprise customer license arrangements, the Company typically requires a purchase order from the distributor or reseller and an executed standard software license agreement from the end-user. The Company requires a purchase order for technical support, product training and consulting services.
 
    Delivery has occurred and the Company has no remaining obligations. The Company’s standard delivery method is free-on-board shipping point. Consequently, it considers delivery of packaged product to have occurred when the products are shipped to distributors 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 with the licenses that include the activation keys that allow the end-user to take immediate possession of the software. For product training and consulting services, the Company fulfills its obligation when the services are performed. For software maintenance and technical support, the Company assumes that the obligations are satisfied ratably over the respective terms of the agreements, which are typically 12 to 24 months.
 
    The fee is fixed or determinable. In the normal course of business, the Company does not provide customers the right to a refund of any portion of their license fees or extended payment terms. The Company sells software maintenance, and technical services, which includes technical support, product training and consulting services, separately and it determines vendor specific objective evidence, or VSOE, of fair value by the price charged for each product or applicable renewal rates.
 
    Collectibility is probable. The Company determines collectibility on a customer-by-customer basis. The Company typically sells to distributors or resellers for whom there are histories of successful collection. New customers are subject to a credit review process that evaluates the customers’ financial position and ultimately their ability to pay. Customers are subject to an ongoing credit review process. If the Company determines from the outset of an arrangement that collectibility is not probable, revenue recognition is deferred until customer payment is received and the other parameters of revenue recognition described above have been achieved. Management’s judgment is required in assessing the probability of collection, which is generally based on evaluation of customer specific information, historical experience and economic market conditions. If market conditions decline, or, if the financial condition of distributors or customers deteriorates, the Company may be unable to determine that collectibility is probable, and it could be required to defer the recognition of revenue until the Company receives customer payment.

7


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

     The Company sells most of its software products bundled with an initial subscription for software maintenance that provides the end-user with free enhancements and upgrades to the licensed product on a when and if available basis. Customers may also elect to purchase technical support, product training or consulting services. The Company allocates revenue to maintenance and any other undelivered elements of the arrangement based on VSOE of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenue, net of any discounts inherent in the arrangement, is allocated to the delivered software product using the residual method and recognized at the outset of the arrangement as the software licenses are delivered. If management cannot objectively determine the fair value of each undelivered element based on VSOE, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined. The Company includes technical service revenues in net revenues in the condensed consolidated statements of income.

     In the normal course of business, the Company does not permit product returns, but it does provide most of its distributors and value added resellers with stock balancing and price protection rights. Stock balancing rights permit distributors to return products to the Company, subject to ordering an equal dollar amount of other products. Price protection rights require that the Company grant retroactive price adjustments for inventories of products held by distributors or resellers if it lowers prices for such products. The Company establishes 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 for stock balancing and price protection provisions incurred are, however, dependent upon future events, including the amount of stock balancing activity by distributors and the level of distributor inventories at the time of any price adjustments. The Company continually monitors the factors that influence the pricing of its products and distributor inventory levels and makes adjustments to these provisions when it believes actual returns and other allowances could differ from established reserves. The Company’s ability to recognize revenue upon shipment to distributors is predicated on its ability to reliably estimate future stock balancing returns. If actual experience or changes in market condition impairs the Company’s ability to estimate returns, it would be required to defer the recognition of revenue until the delivery of the product to the end-user. Allowances for estimated product returns amounted to approximately $3.5 million at September 30, 2003 and $10.5 million at December 31, 2002. The Company has not reduced and has no current plans to reduce its prices for inventory currently held by distributors or resellers. Accordingly, there were no reserves required for price protection at September 30, 2003 or December 31, 2002. The Company 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.

     In May 1997, the Company entered into a five-year joint license, development and marketing agreement with Microsoft, which expired in May 2002. The Company recognized revenue from the Microsoft Development Agreement ratably over the five-year term of the contract in other revenues in the accompanying condensed consolidated statements of income.

8


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

     Accounting for Stock-Based Compensation

     The Company’s stock option program is a broad based, long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. At September 30, 2003, the Company had four stock-based employee compensation plans. The number and frequency of stock option grants are based on competitive practices, operating results of the Company, and other factors. All employees are eligible to participate in the stock option program. Except for non-employee directors, the Company has not granted any options to non-employees.

     Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, defines a fair value method of accounting for issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are not required to adopt the fair value method of accounting for employee stock-based transactions. Companies are permitted to account for such transactions by applying the intrinsic value method of accounting under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, but are required to disclose in a note to the consolidated financial statements pro forma net income and per share amounts as if a company had applied the methods prescribed by SFAS No. 123.

     The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans, stock options granted to employees and non-employee directors and has complied with the disclosure requirements of SFAS No. 123. The Company has elected to follow APB Opinion No. 25 because the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models, including the Black-Scholes model, that were developed for use with traded options that have no vesting restrictions and are fully transferable, as opposed to employee stock options, which are typically non-transferable and last up to ten years. Currently, management believes there is not one agreed upon option valuation method that is comparable among all reporting companies. Specifically, the Black-Scholes model requires the input of highly subjective assumptions, including assumptions related to the expected stock price volatility over the expected life of the option. Because the Company’s stock-based awards to employees have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing pricing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. Since the Black-Scholes model is based on statistical expectations, the calculation can result in substantial earnings volatility that may not agree, as to timing or amount, with the actual gain or loss accrued or realized by the option holder.

     No stock-based employee compensation cost is reflected in net income, as all options granted under the Company’s plans had an exercise price equal to or above market value of the underlying common stock on the date of grant. Had the Company applied the fair value recognition provisions of SFAS No. 123, the Company’s cash flows would have remained unchanged, however net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share information):

9


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

                                   
      Three Months ended September 30,   Nine Months ended September 30,
     
 
      2003   2002   2003   2002
     
 
 
 
Net income as reported
  $ 30,995     $ 16,815     $ 90,668     $ 54,353  
 
   
     
     
     
 
 
                               
 
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects
    (19,997 )     (30,671 )     (67,409 )     (110,953 )
 
   
     
     
     
 
 
Pro forma net income (loss)
  $ 10,998     $ (13,856 )   $ 23,259     $ (56,600 )
 
   
     
     
     
 
 
                               
Basic earnings (loss) per share:
                               
 
As reported
  $ 0.19     $ 0.10     $ 0.55     $ 0.30  
 
   
     
     
     
 
 
Pro forma
  $ 0.07     $ (0.08 )   $ 0.14     $ (0.31 )
 
   
     
     
     
 
Diluted earnings (loss) per share:
                               
 
As reported
  $ 0.18     $ 0.10     $ 0.53     $ 0.30  
 
   
     
     
     
 
 
Pro forma
  $ 0.06     $ (0.08 )   $ 0.14     $ (0.31 )
 
   
     
     
     
 

     For purposes of the pro forma calculations, the fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following assumptions:

                                 
    Stock options granted during the
   
    Three Months ended   Nine Months ended
    September 30,   September 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Expected volatility factor
    0.61       0.69       0.61–0.68       0.69  
Approximate risk free interest rate
    3.0 %     4.0 %     2.5%–3.0 %     4.0 %
Expected lives (in years)
    4.70       4.60       4.70–4.73       4.60  

3. Earnings Per Share

     Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options (calculated using the treasury stock method) and put warrants (calculated using the reverse treasury stock method). Certain shares under the Company’s stock option program and common stock potentially issuable upon conversion of the Company’s convertible subordinated debentures were excluded from the computation of diluted earnings per share due to their anti-dilutive effect for the respective periods.

10


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

     The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share information):

                                   
      Three Months ended   Nine Months ended
      September 30,   September 30,
     
 
      2003   2002   2003   2002
     
 
 
 
Numerator:
                               
 
Net income
  $ 30,955     $ 16,815     $ 90,668     $ 54,353  
 
   
     
     
     
 
Denominator:
                               
 
Denominator for basic earnings per share —
weighted-average shares
    164,310       175,127       165,662       179,712  
Effect of dilutive securities:
                               
 
Put warrants
          9              
 
Employee stock options
    6,801       755       5,473       1,791  
 
   
     
     
     
 
Dilutive common share equivalents
    6,801       764       5,473       1,791  
 
   
     
     
     
 
Denominator for diluted earnings per share — weighted-average shares
    171,111       175,891       171,135       181,503  
 
   
     
     
     
 
Basic earnings per share
  $ 0.19     $ 0.10     $ 0.55     $ 0.30  
 
   
     
     
     
 
Diluted earnings per share
  $ 0.18     $ 0.10     $ 0.53     $ 0.30  
 
   
     
     
     
 
Anti-dilutive weighted shares
    43,843       51,303       43,346       47,618  
 
   
     
     
     
 

4. Other Intangible Assets

     Other intangible assets are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally one to five years. Other intangible assets consist of the following (in thousands):

                                   
      September 30, 2003   December 31, 2002
     
 
      Gross Carrying   Accumulated   Gross Carrying   Accumulated
      Amount   Amortization   Amount   Amortization
     
 
 
 
Amortized intangible assets:
                               
 
Core and product technologies
  $ 81,044     $ 60,368     $ 81,686     $ 52,056  
 
Other
    9,198       7,470       8,460       7,241  
 
   
     
     
     
 
 
  $ 90,242     $ 67,838     $ 90,146     $ 59,297  
 
   
     
     
     
 

     Amortization expense for the three and nine months ended September 30, 2003 was $2.9 million and $8.5 million, respectively, and $2.6 million and $8.6 million for the three and nine months ended September 30, 2002, respectively. Estimated amortization expense is as follows (in thousands):

           
Year ending December 31,
       
 
2003
  $ 11,352  
 
2004
    8,680  
 
2005
    7,407  
 
2006
    2,260  
 
2007
    310  

11


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

5. 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. The Debentures resulted in net proceeds to the Company of approximately $291.9 million, and the recorded debt will accrete to the principal amount at maturity through periodic charges to interest expense. Except under limited circumstances, no interest will be paid on the Debentures prior to maturity. The Debentures are convertible at the option of the security holder at any time on or before the maturity date at a conversion rate of 14.0612 shares of the Company’s Common Stock for each $1,000 principal amount at maturity of Debentures, subject to adjustment in certain circumstances. The Company could redeem the Debentures on or after March 22, 2004. Holders could require the Company to repurchase the Debentures, on fixed dates and at set redemption prices (equal to the issue price plus accrued original issue discount), beginning on March 22, 2004. Accordingly, the Debentures are classified as a current liability in the September 30, 2003 condensed consolidated balance sheet.

6. Segment Information

     The Company operates in a single market for the design, development, marketing, sales and support of access infrastructure software and services for enterprise applications. The Company’s revenues are derived from sales in the Americas, Europe, the Middle East and Africa (“EMEA”) and Asia-Pacific regions. These three geographic regions constitute the Company’s reportable segments.

     The Company does not engage in intercompany revenue transfers between segments. The Company’s management evaluates performance based primarily on revenues in the geographic locations in which the Company operates. Segment profit for each segment includes certain sales, marketing, general and administrative expenses directly attributable to the segment and excludes certain expenses that are managed outside the reportable segments. Costs excluded from segment profit primarily consist of research and development costs, amortization of intangible assets, interest, corporate expenses and income taxes. Corporate expenses are comprised primarily of corporate marketing costs, operations and certain general and administrative expenses, which are separately managed. Accounting policies of the segments are the same as the Company’s consolidated accounting policies.

     Net revenues and segment profit, classified by the major geographic areas in which the Company operates, are as follows (in thousands):

12


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

                                     
        Three Months Ended September 30,   Nine Months Ended September 30,
       
 
        2003   2002   2003   2002
       
 
 
 
Net revenues:
                               
 
Americas (1)
  $ 75,598     $ 61,067     $ 219,433     $ 185,218  
 
EMEA (2)
    54,748       46,847       171,812       144,874  
 
Asia-Pacific
    13,995       10,984       39,636       34,490  
 
Other (3)
                      14,082  
 
   
     
     
     
 
 
Consolidated
  $ 144,341     $ 118,898     $ 430,881     $ 378,664  
 
   
     
     
     
 
 
                               
Segment profit:
                               
 
Americas (1)
  $ 43,526     $ 25,948     $ 118,427     $ 83,749  
 
EMEA (2)
    33,246       26,368       104,398       80,396  
 
Asia-Pacific
    4,646       3,414       15,509       12,169  
 
Other (3)
                      14,082  
 
Unallocated expenses (4):
                               
   
Amortization of intangible assets
    (2,868 )     (2,646 )     (8,541 )     (8,588 )
   
Research and development
    (15,656 )     (17,146 )     (47,025 )     (53,054 )
   
Net interest and other expense
    1,021       1,944       4,099       5,359  
   
Other corporate expenses
    (24,178 )     (18,570 )     (70,626 )     (70,168 )
 
   
     
     
     
 
Consolidated income before income taxes
  $ 39,737     $ 19,312     $ 116,241     $ 63,945  
 
   
     
     
     
 


(1)   The Americas segment is comprised of the United States, Canada and Latin America, excluding royalty fees in (3) below.
 
(2)   Defined as Europe, Middle East and Africa.
 
(3)   Represents royalty fees in connection with the Microsoft Development Agreement, which expired in May 2002.
 
(4)   Represents expenses presented to management on a consolidated basis only and not allocated to the geographic operating segments.

     The Company also tracks revenue according to the following three categories: License Revenue, Technical Services Revenue and Royalty Revenue, but does not track expenses by these categories. As a result, these revenue categories do not constitute segments in accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. Additional information regarding revenue by categories is as follows (in thousands):

                                     
        Three Months Ended September 30,   Nine Months Ended September 30,
       
 
        2003   2002   2003   2002
       
 
 
 
Revenue:
                               
 
License Revenue
  $ 133,475     $ 108,423     $ 397,349     $ 332,175  
 
Technical Services Revenue
    10,866       10,475       33,532       32,407  
 
Royalty Revenue
                      14,082  
 
   
     
     
     
 
   
Net Revenues
  $ 144,341     $ 118,898     $ 430,881     $ 378,664  
 
   
     
     
     
 

13


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

7. Derivative Financial Instruments

     Cash Flow Hedges. A substantial portion of the Company’s anticipated overseas expenses and capital purchasing activities will be transacted in local currencies. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a hedging program that uses forward foreign exchange contracts to reduce a portion of its exposure to these potential changes. The terms of these instruments, and the transactions to which they relate, generally do not exceed 12 months. Currencies hedged are Euros, British pounds sterling, Australian dollars, Swiss francs and Japanese yen. At September 30, 2003 and December 31, 2002, the Company had in place foreign currency forward sale contracts with a notional amount of $40.7 million and $48.9 million, respectively, and foreign currency forward purchase contracts with a notional amount of $111.9 million and $128.4 million, respectively. There was no material ineffectiveness of the Company’s foreign currency forward contracts for the three and nine months ended September 30, 2003.

     Fair Value Hedges. The Company uses interest rate swap instruments to hedge against the change in fair value of certain of its available-for-sale securities due to changes in interest rates. The instruments have an aggregate notional amount of $208.0 million and expire on various dates through November 2007. Each of the instruments swap the fixed rate interest on the underlying investments for a variable rate based on the London Interbank Offered Rate, or LIBOR, plus a specified margin. Changes in the fair value of the swap instruments are recorded in earnings along with related designated changes in the value of the underlying investments. During June 2003, the Company sold $25 million of the underlying fixed rate available-for-sale securities and discontinued hedge accounting for the related $25 million of the interest rate swap. Changes in the fair value of these derivatives are recorded in earnings. There was no material ineffectiveness of the Company’s interest rate swaps for the three and nine months ended September 30, 2003.

     Derivatives Not Designated as Hedges. The Company utilizes credit default contracts for investment purposes that either do not qualify or are not designated for hedge accounting treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations. Accordingly, changes in the fair value of these contracts are recorded in other income (expense), net, if any. Under the terms of these contracts, the Company assumes the default risk, above a certain threshold, of a portfolio of specified high credit quality referenced issuers in exchange for a fixed yield that is recorded in interest income. In the event of default by underlying referenced issuers above specified amounts, the Company will pay the counterparty an amount equivalent to its loss, not to exceed the notional value of the contract. The primary risk associated with these transactions is the default risk of the underlying issuers. The risk levels of these instruments are equivalent to “AAA” and “Super AAA” single securities. The purpose of the credit default contracts is to provide additional yield on certain of the Company’s underlying available-for-sale investments.

     The Company is a party to three credit default contracts that have an aggregate notional amount of $75.0 million and expire on various dates through December 2007. At September 30, 2003, the Company has pledged approximately $83.7 million of investment securities as collateral for these contracts. The Company maintains the ability to manage the composition of the pledged investments and investment earnings are available for operating purposes. Accordingly, these securities are not reflected as restricted investments in the accompanying condensed consolidated balance sheets. The fixed yield earned on these contracts was not material for the three and nine month periods ended September 30, 2003 and is included in interest income in the accompanying condensed consolidated

14


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

statements of income. For the three and nine months ended September 30, 2003, there were no changes in fair value of these credit default contracts.

     As of September 30, 2003, the Company had $7.4 million of derivative assets and $7.8 million of derivative liabilities, representing the fair values of the Company’s outstanding derivative instruments, which are recorded in other current assets, other assets and accrued expenses in the accompanying condensed consolidated balance sheets. The change in derivatives recognized in other comprehensive income includes unrealized gains (losses) that arose from changes in market value of derivatives that were held during the period, and gains (losses) that were previously unrealized, but have been recognized in current period net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or stockholders’ equity. The following table presents these components of other comprehensive income, net of tax for the Company’s derivative instruments (in thousands):

                                 
    Three Months ended   Nine Months ended
    September 30,   September 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Unrealized gains (losses) on derivative instruments
  $ 1,040     $ (866 )   $ 4,998     $ 5,737  
Reclassification of realized (gains) losses
    (2,354 )     (1,223 )     (4,771 )     (1,189 )
 
   
     
     
     
 
Net (decrease) increase in other comprehensive income due to derivative instruments
  $ (1,314 )   $ (2,089 )   $ 227     $ 4,548  
 
   
     
     
     
 

8. Comprehensive Income

     The components of comprehensive income, net of tax, are as follows (in thousands):

                                   
      Three Months ended   Nine Months ended
      September 30,   September 30,
     
 
      2003   2002   2003   2002
     
 
 
 
Net income
  $ 30,995     $ 16,815     $ 90,668     $ 54,353  
Other comprehensive income:
                               
 
Changes in unrealized gain/loss on available-for-sale securities
    (88 )     (86 )     423       (32 )
 
Changes in unrealized gain/loss on derivative instruments
    (1,314 )     (2,089 )     227       4,548  
 
   
     
     
     
 
Comprehensive income
  $ 29,593     $ 14,640     $ 91,318     $ 58,869  
 
   
     
     
     
 

     The components of accumulated other comprehensive income, net of tax, are as follows (in thousands):

                   
      September 30,   December 31,
      2003   2002
     
 
Unrealized gain on available-for-sale securities
  $ 744     $ 321  
Unrealized gain on derivative instruments
    3,739       3,512  
 
   
     
 
 
Accumulated other comprehensive income
  $ 4,483     $ 3,833  
 
   
     
 

15


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

9. Income Taxes

     The Company maintains certain operational and administrative processes in overseas subsidiaries, and foreign earnings are taxed at lower foreign tax rates. The Company does not expect to remit earnings from its foreign subsidiaries. The Company’s effective tax rate increased to 22% for the nine months ended September 30, 2003 from 15% for the same period in the prior year, primarily due to an increase in estimated annual taxable income in the geographic locations that are taxed at a higher rate.

10. Stock Repurchase Programs

     The Company’s Board of Directors has authorized an ongoing stock repurchase program. In May 2003, the Board of Directors authorized the repurchase of an additional $200 million under this stock repurchase program, the objective of which is to manage actual and anticipated dilution. At September 30, 2003, approximately $163.9 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 paid out of general corporate funds. During the three and nine months ended September 30, 2003, the Company purchased 732,000 and 2,757,000 shares, respectively, of outstanding Common Stock on the open market for approximately $13.9 million and $43.7 million, respectively (at an average per share price of $19.02 and $15.86).

     From time to time, the Company enters into arrangements with financial institutions as part of the stock repurchase program in order to lower the Company’s average cost to acquire shares. These arrangements are described below.

     During 2002, the Company entered into an agreement, as amended, with a large financial institution in a private transaction to purchase up to 3.8 million shares of the Company’s Common Stock at various times through February 2003. Pursuant to the terms of the agreement, $25 million was paid to this institution during the third quarter of 2002. During 2002, the Company received 2,655,469 shares under this agreement with a total value of $18.5 million. The agreement matured in February 2003, and the Company received 390,830 additional shares with a total value of $6.5 million.

     Periodically, the Company enters into private structured stock repurchase transactions with a large financial institution. Under the terms of these agreements and in exchange for an up front payment, the Company is entitled to receive a fixed number of shares of its Common Stock or a predetermined cash amount upon expiration of the agreement depending on the closing price of the Company’s Common Stock at maturity. Pursuant to one of these transactions, during the three month period ended September 30, 2003, the Company received 711,458 shares of Common Stock for $15.0 million. For aggregate up front payments of $55 million, during the nine month period ended September 30, 2003, the Company received a cash payment of approximately $16.7 million and received 2,867,298 shares upon maturity of certain of these transactions.

     In December 2002, the Company entered into an agreement with a large financial institution requiring that the Company purchase up to 1,560,000 shares of the Company’s Common Stock at fixed prices if the Company’s Common Stock traded at designated levels between December 16, 2002 and January 23, 2003. As of December 31,

16


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

2002, the Company had a potential repurchase obligation of approximately $9.1 million, which was classified as common stock subject to repurchase in the December 31, 2002 consolidated balance sheet. During January 2003, this agreement expired and no shares were repurchased.

     During the first quarter of 2003, the Company entered into a private structured stock repurchase agreement with a large financial institution. Pursuant to the terms of the agreement, $25 million was paid up front to this institution, with the ultimate number of shares repurchased dependent on market conditions. Upon expiration of the agreement in June 2003, 1,473,516 shares were delivered to the Company. During July 2003, the Company entered into two similar transactions with the same financial institution for an aggregate up front payment of $40 million. During the three months ended September 30, 2003, the Company received 499,057 shares under these agreements. The ultimate number of shares repurchased will be dependent on market conditions.

     During the nine months ended September 30, 2003, the Company sold put warrants that entitled the holder of each warrant to sell to the Company, generally by physical delivery, one share of the Company’s Common Stock at a specified price. Under the agreements the Company sold 450,000 put warrants at an average exercise price of $12.57 and received premium proceeds of approximately $0.7 million. Additionally, the Company paid $2.5 million for the purchase of 200,000 shares upon the exercise of outstanding put warrants, while 1,200,000 put warrants expired unexercised. No put warrants were sold, exercised or expired during the three months ended September 30, 2003. As of September 30, 2003, no put warrants were outstanding.

11. Legal Proceedings

     The Company is a defendant in various matters of litigation generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate liability would not materially affect the Company’s financial position, result of operations or cash flows.

12. Commitments

     The Company is a party to a synthetic lease arrangement with a lessor 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 lease debt as an asset or a liability on its condensed consolidated balance sheet. Consequently, payments are made pursuant to the lease are recorded as operating expenses in the Company’s condensed 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 lease arrangements.

     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 lease term, the Company has the option to sublease the property and upon thirty-days’ written notice, the Company has the option to purchase the property for an amount representing the original property cost and transaction fees of approximately $61.0 million plus any lease breakage costs and outstanding amounts owed. Upon

17


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

at least 180 days notice prior to the termination of the initial lease term, the Company has the option to remarket the property for sale to a third party. If the Company chooses not to purchase the property at the end of the lease term, it has guaranteed a residual value to the lessor of approximately $51.9 million and possession of the buildings will be returned to the lessor. If the fair value of the building were to decline below $51.9 million, the Company would have to make up 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 $63.0 million in cash and/or investment securities as collateral. The Company manages the composition of the pledged investments and investment earnings are available for operating purposes. Additionally, the Company must maintain a minimum cash and investment balance of $100.0 million, excluding the Company’s Debentures, collateralized investments and equity investments, as of the end of each fiscal quarter. As of September 30, 2003, the Company had approximately $217.0 million in cash and investments in excess of those required levels. The synthetic lease includes non-financial covenants, including the maintenance of the properties and adequate insurance, prompt delivery of financial statements to the lender of the lessor and prompt payment of taxes associated with the properties. As of September 30, 2003, the Company was in compliance with all material provisions of the arrangement.

     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. FIN No. 46 is effective for certain disclosure requirements and for variable interest entities created after February 1, 2003, and for periods ending after December 15, 2003 for all other variable interest entities. The Company has determined that it will not be required to consolidate the lessor, the leased facility or the related debt upon the adoption of FIN No. 46. Accordingly, the Company does not expect any 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.

13. Recent Accounting Pronouncements

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted SFAS No. 148 and there was no material impact on its financial position, results of operations or cash flows from adoption.

     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003, for hedging relationships designated after June

18


Table of Contents

Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003

30, 2003, and to certain preexisting contracts. The Company adopted SFAS No. 149 and there was no material impact on its financial position, results of operations or cash flows from adoption.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures in its financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with this standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 is effective for all financial instruments entered into on or modified after May 31, 2003. For existing financial instruments, SFAS No. 150 is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 and there was no material impact on its financial position, results of operations or cash flows from adoption.

     In November 2002, the FASB’s Emerging Issues Task Force (“EITF”) reached a final consensus on Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Under EITF Issue No. 00-21, revenue arrangements with multiple deliverables are required to be divided into separate units of accounting under certain circumstances. The Company adopted EITF Issue No. 00-21 on July 1, 2003, and such adoption did not have a material effect on its condensed consolidated financial statements for the three and nine months ended September 30, 2003.

19


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     We develop, market, license and support access infrastructure software and services that enable effective and efficient enterprise-wide deployment and management of applications and information, including those designed for Microsoft Windows operating systems, for UNIX operating systems, such as Sun Solaris, HP-UX or IBM-AIX (collectively, UNIX operating systems), and for Web-based information systems. Our largest source of revenue is our MetaFrame Presentation Server products. Our MetaFrame products permit organizations to provide users with access to Windows based, Web-based, and UNIX applications without regard to location, network connection or type of client hardware platforms. We market and license our products primarily through multiple channels such as value-added resellers, channel distributors, system integrators and independent software vendors, managed by our worldwide sales force. We also promote our products through relationships with a wide variety of industry participants, including Microsoft Corporation.

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.

     We market and license software products primarily through value-added resellers, channel distributors, system integrators and independent software vendors, managed by our worldwide sales force. We also sell our software maintenance and technical services, which includes technical support, product training and consulting services, separately. Our software licenses are generally perpetual, and are delivered by means of traditional packaged products and electronically.

     Our packaged products are typically purchased by medium and small-sized businesses with a minimal number of locations. In these cases, the software license is delivered with the packaged product. Electronic license arrangements are used with more complex multi-server environments typically found in larger business enterprises that deploy our products on a department or enterprise-wide basis, which could require differences in product features and functionality at various customer locations. Once we receive a purchase order, the enterprise customer license arrangements are electronically delivered to the customer with “software activation keys” that enable the feature configuration ordered by the end-user. Software may be delivered indirectly by a channel distributor or directly by us pursuant to a purchase order.

     We recognize revenue when it is earned. Our revenue recognition policies are in compliance with the American Institute of Certified Public Accountants Statement of Position, or SOP, 97-2 (as amended by SOP 98-4 and SOP 98-9) and related interpretations, Software Revenue Recognition. We recognize revenue when all of the following criteria are met: persuasive evidence of the arrangement exists; delivery has occurred and we have no remaining obligations; the fee is fixed or determinable; and collectibility is probable. We define these four criteria as follows:

    Persuasive evidence of the arrangement exists. We recognize revenue on packaged product upon shipment to distributors and resellers. For packaged product sales, it is our customary practice to require a purchase

20


Table of Contents

      order from distributors who have previously negotiated a master packaged product distribution or resale agreement. For enterprise customer license arrangements, we typically require a purchase order from the distributor or reseller and an executed standard software license agreement from the end-user. We require a purchase order for technical support, product training and consulting services.
 
    Delivery has occurred and we have no remaining obligations. Our standard delivery method is free-on-board shipping point. Consequently, we consider delivery of our packaged product to have occurred when the products are shipped to distributors pursuant to an agreement and purchase order. We consider delivery of licenses under electronic licensing agreements to have occurred when the related products are shipped and the end-user has been electronically provided with the licenses that include the activation keys that allow the end-user to take immediate possession of the software. For product training and consulting services, we fulfill our obligation when the services are performed. For software maintenance and technical support, we assume that the obligations are satisfied ratably over the respective terms of the agreements, which are typically 12 to 24 months.
 
    The fee is fixed or determinable. In the normal course of business, we do not provide customers the right to a refund of any portion of their license fees or extended payment terms. We sell software maintenance, and technical services, which includes technical support, product training and consulting services, separately and we determine vendor specific objective evidence, or VSOE, of fair value by the price charged for each product or applicable renewal rates.
 
    Collectibility is probable. We determine collectibility on a customer-by-customer basis. We typically sell to distributors or resellers for whom there are histories of successful collection. New customers are subject to a credit review process that evaluates the customers’ financial position and ultimately their ability to pay. Customers are subject to an ongoing credit review process. If we determine from the outset of an arrangement that collectibility is not probable, we defer revenue recognition until customer payment is received and the other parameters of revenue recognition described above have been achieved. Our judgment is required in assessing the probability of collection, which is generally based on evaluation of customer specific information, historical experience and economic market conditions. If market conditions decline, or, if the financial condition of our distributors or customers deteriorates, 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 payment.

     We sell most of our software products bundled with an initial subscription for software maintenance that provides the end-user with free enhancements and upgrades to the licensed product on a when and if available basis. Customers may also elect to purchase technical support, product training or consulting services. We allocate revenue to maintenance and any other undelivered elements of the arrangement based on VSOE of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenue, net of any discounts inherent in the arrangement, is allocated to the delivered software product using the residual method and recognized at the outset of the arrangement as the software licenses are delivered. If we cannot objectively determine the fair value of each undelivered element based on VSOE, we defer revenue recognition until all elements are delivered, all services have been performed, or until fair value can be objectively determined. We include technical service revenues in net revenues in our accompanying condensed consolidated statements of income.

21


Table of Contents

     In the normal course of business, we do not permit product returns, but we do provide most of our distributors and value added resellers with stock balancing and price protection rights. Stock balancing rights permit distributors to return products to us, subject to ordering an equal dollar amount of our other products. 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 for stock balancing and price protection provisions incurred are, however, dependent upon future events, including the amount of stock balancing activity by our distributors and the level of distributor inventories at the time of any price adjustments. We continually monitor the factors that influence the pricing of our products and distributor inventory levels and make adjustments to these provisions when we believe actual returns and other allowances could differ from established reserves. Our ability to recognize revenue upon shipment to our distributors is predicated on our ability to reliably estimate future stock balancing returns. If actual experience or changes in market condition impairs our ability to estimate returns, we would be required to defer the recognition of revenue until the delivery of the product to the end-user. Allowances for estimated product returns amounted to approximately $3.5 million at September 30, 2003 and $10.5 million at December 31, 2002. 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 September 30, 2003 or December 31, 2002. We record estimated reductions to revenue for customer programs and incentive offerings including volume-based incentives. If market conditions were to decline, we could take actions to increase our customer incentive offerings and could result in an incremental reduction to our revenue at the time the incentive is offered.

Stock-Based Compensation

     Our stock option program is a broad based, long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. The number and frequency of stock option grants are based on competitive practices, our operating results, and other factors. All employees are eligible to participate in the stock option program.

     Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, defines a fair value method of accounting for issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are not required to adopt the fair value method of accounting for employee stock-based transactions. Companies are permitted to account for such transactions under Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, but are required to disclose in a note to the consolidated financial statements pro forma net income and per share amounts as if a company had applied the methods prescribed by SFAS No. 123.

     As of September 30, 2003, we had four stock-based compensation plans. We grant stock options for a fixed number of shares to employees with an exercise price equal to or above the fair value of the shares at the date of grant. As discussed above and in note 2 to our condensed consolidated financial statements, we apply the intrinsic value method under APB Opinion No. 25 and related interpretations in accounting for our plans. Accordingly, no compensation cost has been recognized for our fixed stock plans and our stock purchase plan. However, the impact

22


Table of Contents

on our consolidated financial statements from the use of options is reflected in the calculation of earnings per share in the form of dilution (see note 3 to our accompanying condensed consolidated financial statements).

     The following table (in thousands, except option price) provides information as of September 30, 2003 about the securities authorized for issuance to our employees and directors under our fixed stock compensation plans, consisting of our Amended and Restated 1995 Stock Plan, the Second Amended and Restated 1995 Employee Stock Purchase Plan, the 1995 Non-Employee Director Option Plan and the Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan:

                         
    (A)   (B)   (C)
   
 
 
                    Number of securities
    Number of           remaining available
    securities to be           for future issuance
    issued upon   Weighted-average   under equity
    exercise of   exercise price of   compensation plans
    outstanding   outstanding   (excluding
    options, warrants   options, warrants   securities reflected
Plan   and rights   and rights   in column (A))

 
 
 
Equity compensation plans approved by security holders
    40,487     $ 24.24       36,423  
Equity compensation plans not approved by security holders
                 
 
   
             
 
Total
    40,487     $ 24.24       36,423  
 
   
             
 

     The following table provides information about stock options granted for fiscal year 2002 and for the nine months ended September 30, 2003 for employees, non-employee directors and for certain executive officers. The stock option data for listed officers relates to our Named Executive Officers. The “Named Executive Officers” consist of our chief executive officer and the four other most highly compensated executive officers who received total annual salary and bonus in excess of $100,000 in 2002, as reported in our Proxy Statement dated April 4, 2003 and who are current employees:

                 
    Nine Months ended   Year ended
    September 30, 2003   December 31, 2002
   
 
Net grants to all employees, non-employee directors and executive officers as a percent of outstanding shares (1) (2)
    1.38 %     1.17 %
 
   
     
 
 
               
Grants to Named Executive Officers as a percent of outstanding shares (2)
    0.12 %     0.36 %
 
   
     
 
 
               
Grants to Named Executive Officers as a percent of total options granted
    3.69 %     6.90 %
 
   
     
 
 
               
Cumulative options held by Named Executive Officers as a percent of total options outstanding (3)
    10.09 %     9.48 %
 
   
     
 


(1)   Net grants represent total options granted during the period net of options forfeited during the period.
 
(2)   Calculation is based on outstanding shares of common stock as of the beginning of the respective period.
 
(3)   Calculation is based on total options outstanding as of the end of the respective period.

23


Table of Contents

     The following table presents our option activity from December 31, 2001 through September 30, 2003 (in thousands, except weighted-average exercise price):

                           
              Options Outstanding
             
      Options           Weighted
      Available   Number   Average
      for Grant   of Shares   Exercise Price
     
 
 
Balance at December 31, 2001
    21,991       39,596     $ 28.92  
 
Granted at market value
    (9,275 )     9,275       9.98  
 
Granted above market value
    (356 )     356       17.92  
 
Exercised
          (551 )     6.12  
 
Forfeited/cancelled
    7,455       (7,455 )     30.86  
 
Additional shares reserved
    10,186       N/A       N/A  
 
   
     
         
Balance at December 31, 2002
    30,001       41,221       24.51  
 
   
     
         
 
Granted at market value
    (5,260 )     5,260       15.68  
 
Granted above market value
    (349 )     349       12.00  
 
Exercised
          (3,059 )     10.18  
 
Forfeited/cancelled
    3,284       (3,284 )     26.19  
 
Reduction in plan shares (1)
    (500 )     N/A       N/A  
 
Additional shares reserved
    9,247       N/A       N/A  
 
   
     
         
Balance at September 30, 2003
    36,423       40,487       24.24  
 
   
     
         


(1)   The number of shares reserved for issuance under our Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan was reduced by 500,000 shares pursuant to an amendment to such option plan (which amendment is filed as Exhibit 10.1 herewith) authorized by our Board of Directors on May 15, 2003.

     A summary of our in-the-money and out-of-the-money option information as of September 30, 2003 is as follows (in thousands, except weighted average exercise price). Out-of-the-money options are those options with an exercise price equal to or above the closing price of $22.13 per share for our common stock at September 30, 2003.

                                                   
      Exercisable   Unexercisable   Total
     
 
 
              Weighted           Weighted           Weighted
              Average           Average           Average
      Shares   Exercise Price   Shares   Exercise Price   Shares   Exercise Price
     
 
 
 
 
 
In-the-money
    11,011     $ 14.39       12,066     $ 12.80       23,077     $ 13.56  
Out-of-the-money
    14,770       38.57       2,640       37.53       17,410       38.41  
 
   
             
             
         
 
Total options outstanding
    25,781       28.24       14,706       17.26       40,487       24.24  
 
   
             
             
         

     The following table provides information with regard to our stock option grants during the nine months ended September 30, 2003 to the Named Executive Officers:

                         
    Individual Grants (1)
   
    Number of Securities                
    Underlying Options   Exercise Price   Expiration
    Granted (#)   ($/share)   Date
   
 
 
Mark Templeton
    37,500     $ 12.00     March 3, 2013
 
    37,500     $ 18.05     July 31, 2013
John Burris
    17,500     $ 12.00     March 3, 2013
 
    17,500     $ 18.05     July 31, 2013
Robert Kruger
    17,500     $ 12.00     March 3, 2013
 
    17,500     $ 18.05     July 31, 2013
David Urbani
    15,000     $ 12.00     March 3, 2013
 
    15,000     $ 18.05     July 31, 2013
Stefan Sjostrom
    16,000     $ 12.00     March 3, 2013
 
    16,000     $ 18.05     July 31, 2013

(1)   These options vest over four years at a rate of 25% of the shares underlying the option one year from the date of the grant and at a rate of 2.08% monthly thereafter.

24


Table of Contents

     The following table presents certain information regarding option exercises for the nine months ended September 30, 2003 and outstanding options held by Named Executive Officers as of September 30, 2003:

                                 
                    Number of Securities   Values of Unexercised In-
                    Underlying Unexercised   the-Money Options at
    Shares Acquired on   Value   Options at September 30, 2003   September 30, 2003 ($)
    Exercise (#)   Realized ($)(1)   Exercisable/Unexercisable   Exercisable/Unexercisable(2)
   
 
 
 
Mark Templeton
                1,887,107/240,393       $5,636,391/$1,714,109  
John Burris
                394,606/141,144       $507,432/$1,147,531  
Robert Kruger
    7,075     $ 107,343       186,450/218,142       $442,342/$1,204,926  
David Urbani
    23,500     $ 301,958       451,301/239,449       $1,596,139/$2,026,342  
Stefan Sjostrom
                156,022/171,228       $270,226/$854,507  


(1)   Amounts disclosed in this column were calculated based on the difference between the fair market value of our common stock on the date of exercise and the exercise price of the options in accordance with regulations promulgated under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and do not reflect amounts actually received by the named officers.
 
(2)   Value is based on the difference between the option exercise price and the fair market value at September 30, 2003 ($22.13 per share), multiplied by the number of shares underlying the option.

     For further information regarding our stock option plans, see note 2 to our condensed consolidated financial statements.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our condensed 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 and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the year ended December 31, 2002 for further information regarding our critical accounting policies and estimates.

     The notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2002, the unaudited interim condensed consolidated financial statements and the related notes to the unaudited interim condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q and the factors and events described elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including in “Certain Factors Which May Affect Future Results,” contain additional information related to our accounting policies and should be read in conjunction with the following discussion and analysis relating to the individual financial statement captions and our overall financial performance, operations and financial position.

25


Table of Contents

Results of Operations

     The following table sets forth our condensed consolidated statements of income data and presentation of that data as a percentage of change from period-to-period.

                                                     
                                        Increase/(Decrease) For The
                                       
                                        Three Months   Nine Months
        Three Months Ended   Nine Months Ended   Ended   Ended
        September 30,   September 30,   September 30, 2003   September 30, 2003
       
 
  Vs.   Vs.
        2003   2002   2003   2002   September 30, 2002   September 30, 2002
       
 
 
 
 
 
Net revenues
  $ 144,341     $ 118,898     $ 430,881     $ 378,664       21.4 %     13.8 %
Cost of revenues (excluding amortization, presented separately below)
    5,350       4,375       15,117       13,885       22.3       8.9  
 
   
     
     
     
                 
Gross margin
    138,991       114,523       415,764       364,779       21.4       14.0  
Operating expenses:
                                               
 
Research and development
    15,656       17,146       47,025       53,054       (8.7 )     (11.4 )
 
Sales, marketing and support
    61,331       56,291       183,592       178,902       9.0       2.6  
 
General and administrative
    20,420       21,072       64,464       65,649       (3.1 )     (1.8 )
 
Amortization of intangible assets
    2,868       2,646       8,541       8,588       8.4       (0.5 )
 
   
     
     
     
                 
   
Total operating expenses
    100,275       97,155       303,622       306,193       3.2       (0.8 )
 
   
     
     
     
                 
Income from operations
    38,716       17,368       112,142       58,586       122.9       91.4  
Interest income
    5,302       7,068       15,477       21,261       (25.0 )     (27.2 )
Interest expense
    (4,558 )     (4,303 )     (13,630 )     (13,523 )     5.9       0.8  
Other income (expense), net
    277       (821 )     2,252       (2,379 )     133.7       194.7  
 
   
     
     
     
                 
Income before income taxes
    39,737       19,312       116,241       63,945       105.8       81.8  
Income taxes
    8,742       2,497       25,573       9,592       250.1       166.6  
 
   
     
     
     
                 
Net income
  $ 30,995     $ 16,815     $ 90,668     $ 54,353       84.3 %     66.8 %
 
   
     
     
     
                 

     Net Revenues. Our operations consist of the design, development, marketing and support of access infrastructure software and services that enable effective and efficient enterprise-wide deployment and management of, and access to, applications and information.

     We present net revenues in the following three categories outlined below: License Revenue, Technical Services Revenue, and Royalty Revenue. License Revenue primarily represents fees related to the licensing of our MetaFrame products and Citrix Subscription Advantage (our terminology for software maintenance). Technical Services Revenue consists primarily of technical support, product training and certification, and consulting services related to implementation of our software products. We recognize Technical Services and Citrix Subscription Advantage revenues ratably over the term of the contract, which is typically 12 to 24 months.

     In May 1997, we entered into a five-year joint license, development and marketing agreement with Microsoft, which expired in May 2002. We recognized revenue from the Microsoft Development Agreement ratably over the five-year term of the contract in other revenues in our accompanying condensed consolidated statements of income. Royalty Revenue represents the fees recognized in connection with the Microsoft Development Agreement.

     With respect to product mix, the increase in net revenues for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002 was primarily attributable to an increase in License Revenue due mainly to an increase in Citrix MetaFrame Presentation Server licenses sold for Windows operating systems, particularly under enterprise customer license arrangements and an increase in revenues related to Citrix Subscription Advantage renewals. Also, the increase over last year was partially due to a weakness in packaged product sales to our distributors and resellers during the second and third quarters of 2002, that resulted from an overall weakness in IT spending and a reduction in packaged product inventory held by our distributors.

26


Table of Contents

These increases were partially offset by a decrease in Royalty Revenue associated with the expiration of the Microsoft Development Agreement in May 2002.

     Deferred revenues, primarily related to Citrix Subscription Advantage and Technical Services Revenues, increased approximately $41 million as compared to December 31, 2002. This increase was due primarily to increased renewals of Citrix Subscription Advantage, as well as an increase in enterprise customer license arrangements, which typically result in a greater portion of revenue being deferred. We currently expect Citrix Subscription Advantage renewals to continue to increase and as a result we currently expect deferred revenue to also increase.

     An analysis of our net revenues is presented below:

                                                   
                                      Increase/(Decrease) For The
                                     
      Three Months Ended   Nine Months Ended   Three Months Ended   Nine Months Ended
      September 30,   September 30,   September 30, 2003   September 30, 2003
     
 
  Vs.   Vs.
      2003   2002   2003   2002   September 30, 2002   September 30, 2002
     
 
 
 
 
 
License Revenue
    92.5 %     91.2 %     92.2 %     87.7 %     23.1 %     19.6 %
Technical Services Revenue
    7.5       8.8       7.8       8.6       3.7       3.5  
Royalty Revenue
                      3.7             (100.0 )
 
   
     
     
     
                 
 
Net Revenues
    100.0 %     100.0 %     100.0 %     100.0 %     21.4 %     13.8 %

     International and Segment Revenues. International revenues (sales outside of the United States) as a percent of net revenues remained relatively unchanged and accounted for approximately 52% of net revenues for the three months ended September 30, 2003 and 53% of net revenues for the three months ended September 30, 2002 and approximately 53% of net revenues for the nine months ended September 30, 2003 and 52% of net revenues for the nine months ended September 30, 2002. For detailed information on international revenues, please refer to note 6 to our condensed consolidated financial statements appearing in this report.

     An analysis of our geographic segment net revenue is presented below:

                                                   
                                      Increase/(Decrease) For The
                                     
                                      Three Months   Nine Months
      Three Months Ended   Nine Months Ended   Ended   Ended
      September 30,   September 30,   September 30, 2003   September 30, 2003
     
 
  Vs.   Vs.
      2003   2002   2003   2002   September 30, 2002   September 30, 2002
     
 
 
 
 
 
Americas (1)
    52.4 %     51.4 %     50.9 %     48.9 %     23.8 %     18.5 %
EMEA (2)
    37.9       39.4       39.9       38.3       16.9       18.6  
Asia-Pacific
    9.7       9.2       9.2       9.1       27.4       14.9  
Other (3)
                      3.7             (100.0 )
 
   
     
     
     
                 
 
Net Revenues
    100.0 %     100.0 %     100.0 %     100.0 %     21.4 %     13.8 %


(1)   The Americas segment is comprised of the United States, Canada and Latin America, excluding royalty fees in (3) below.
 
(2)   Defined as Europe, Middle East and Africa.
 
(3)   Represents royalty fees earned in connection with the Microsoft Development Agreement, which expired in May 2002.

27


Table of Contents

     The increase in geographic segment net revenues for the three and nine months ended September 30, 2003 compared to the same periods in 2002 was primarily due to strong demand across all geographic segments, particularly in enterprise customer license arrangements and Citrix Subscription Advantage renewals.

     Cost of Revenues. Cost of revenues consisted primarily of the cost of royalties, product media and duplication, manuals, packaging materials and shipping expense. Cost of revenues also consisted of compensation and other personnel-related costs of generating services revenue. Our cost of revenues excludes amortization of core technology, which is shown as a component of amortization expense in our accompanying condensed consolidated statements of income. The increase in cost of revenues for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002 is due primarily to the increase in net revenues described above. During 2004, certain royalty agreements are expected to expire. Although these expirations are expected to reduce certain costs of royalties, cost of revenues will fluctuate from time to time based on a number of factors discussed above.

     Gross Margin. Gross margin as a percentage of net revenue was comparable for all periods presented. We currently anticipate that gross margin as a percentage of net revenues will remain relatively unchanged as compared with current levels for the remainder of 2003. During 2004, certain royalty agreements are expected to expire; however, gross margin will fluctuate from time to time based on a number of factors attributable to the cost of revenues as discussed above.

     Research and Development Expenses. Research and development expenses consisted primarily of personnel-related costs. We expensed all development costs included in the research and development of software products and enhancements to existing products as incurred except for certain core technologies. Research and development expenses decreased for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002, primarily due to severance, relocation and reduced headcount costs and related facility charges associated with the consolidation of our Salt Lake City, Utah and Columbia, Maryland development teams into our remaining engineering facilities in Fort Lauderdale, Florida during 2002.

     Sales, Marketing and Support Expenses. Sales, marketing and support expenses increased for the three months ended September 30, 2003 compared to the three months ended September 30, 2002 due to an increase in marketing program costs primarily resulting from our launch of a worldwide brand awareness and advertising campaign.

     Sales, marketing and support expenses increased for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 due primarily to increases in commissions, product training costs, and distributor commissions associated with the increase in our software maintenance renewals. These increases were partially offset by a reduction in marketing program costs and a decrease in facility costs associated with our Columbia, Maryland facility, which was consolidated into our remaining Fort Lauderdale, Florida facilities during 2002. We currently expect sales, marketing and support expenses to increase as we continue our global brand awareness and advertising campaign and invest in sales and marketing initiatives.

     General and Administrative Expenses. General and administrative expenses decreased slightly for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002, primarily due to a decrease in our provision for doubtful accounts. General and administrative expenses decreased slightly for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 primarily due to a decrease in depreciation expense resulting from asset maturities and the abandonment of certain leasehold improvements during 2002 and a decrease in rent expense related to the exit of certain leased office space during

28


Table of Contents

2002. These decreases were partially offset by increases in legal fees during the first quarter of 2003 and insurance costs.

     Amortization of Intangible Assets. Amortization expense related primarily to acquired core technology and was generally comparable for all periods presented.

     Interest Income. Interest income decreased for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002, primarily due to a decrease in interest rates.

     Interest Expense. Interest expense remained relatively unchanged for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002 and primarily represented non-cash interest accretion on our convertible subordinated debentures.

     Other Income (Expense), Net. Other income (expense), net is primarily comprised of realized gains (losses) on the sale of our investments, losses resulting from the other-than-temporary declines in the fair value of our investments and remeasurement and foreign currency transaction gains (losses). Other income (expense), net increased for the three and nine months ended September 30, 2003 compared to the three and nine months ended September 30, 2002, due primarily to a decline in remeasurement and foreign currency transaction losses and realized gains on the sale of certain of our available-for-sale investments.

     Income Taxes. We maintain certain operational and administrative processes in overseas subsidiaries, and foreign earnings are taxed at lower foreign tax rates. We do not expect to remit earnings from our foreign subsidiaries. Our effective tax rate increased to 22% for the nine months ended September 30, 2003 from 15% for the same period in the prior year, primarily due to an increase in estimated annual taxable income in our geographic locations that are taxed at a higher rate.

Liquidity And Capital Resources

     During the nine months ended September 30, 2003, we generated positive operating cash flows of $186.4 million. These cash flows related primarily to net income of $90.7 million, adjusted for, among other things, tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options of $16.7 million, non-cash charges, including depreciation and amortization expenses of $26.6 million and the accretion of original issue discount and amortization of financing costs on our convertible subordinated debentures of $13.6 million, and an aggregate increase in cash flow from our operating assets and liabilities of $36.9 million due primarily to an increase in deferred revenue of $40.6 million. Our investing activities provided $24.7 million of cash consisting primarily of the net proceeds, after reinvestment, from sales and maturities of investments of $33.1 million, partially offset by expenditures of $7.0 million for our purchase of property and equipment. Our financing activities used cash of $89.4 million related primarily to our expenditure of $124.6 million for our stock repurchase program, partially offset by the proceeds received from the issuance of common stock under our employee stock compensation plans of $34.6 million.

     During the nine months ended September 30, 2002, we generated positive operating cash flows of $124.5 million. These cash flows related primarily to net income of $54.4 million, adjusted for, among other things, tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options of $22.1 million, non-cash charges, including depreciation and amortization expenses of $32.2 million, provisions for product returns of $18.0 million (primarily due to our stock rotation program) and the accretion of original issue

29


Table of Contents

     discount and amortization of financing costs on our convertible subordinated debentures of $13.4 million. These cash inflows were partially offset by an aggregate decrease in cash flow from our operating assets and liabilities of $18.9 million. Our investing activities provided $23.2 million of cash consisting primarily of net proceeds, after reinvestment, from sales and maturities of investments of $51.0 million, $17.1 million for our purchase of property and equipment and net cash paid for acquisitions (a contingent payment in connection with our February 2000 acquisition of Innovex) of approximately $10.7 million. We used $169.8 million in cash in financing activities related primarily to our expenditure of $148.0 million for our stock repurchase program, and $27.8 million in our debenture repurchase program.

     Cash and Investments

     As of September 30, 2003, we had $810.7 million in cash and investments, including $264.5 million in cash and cash equivalents. The increase in cash and investments compared to December 31, 2002 was due primarily to cash flow from operations, partially offset by cash paid under our stock repurchase program. In addition, we had $108.0 million of working capital at September 30, 2003 as compared to $186.4 million at December 31, 2002. The decrease in working capital compared to December 31, 2002 was due primarily to the reclassification of our convertible subordinated debentures as a current liability as of March 31, 2003 partially offset by the reclassification of the related held-to-maturity investments to short-term. See “Liquidity and Capital Resources—Convertible Subordinated Debentures” and note 5 to our condensed consolidated financial statements for further information. We generally invest our cash and cash equivalents in investment grade, highly liquid securities to minimize interest rate risk and allow for flexibility in the event of immediate cash needs.

     In December 2000, we invested $158.1 million in a trust managed by an investment advisor. The purpose of the trust is to maintain sufficient liquidity in the event that our debentures are redeemed in March 2004. Our investment in the trust matures on March 22, 2004, and comprises all of the trust’s assets. Therefore, we classified the investment as short-term in our September 30, 2003 condensed consolidated balance sheet to reflect the maturity within one year of the balance sheet date. The trust’s assets primarily consist of AAA-rated zero-coupon corporate securities. The trust entered into a credit risk swap agreement with the investment advisor, which effectively increased the yield on the trust’s assets and for which value the trust assumed the credit risk of ten investment-grade companies. The effective yield of the trust, including the credit risk swap agreement, is 6.72% and the principal balance will accrete to $195 million in March 2004. We record our investment in the trust and the underlying investments and swap as held-to-maturity zero-coupon corporate securities in our consolidated financial statements. We do not recognize changes in the fair value of the held-to-maturity investment unless a decline in the fair value of the trust is other-than-temporary, in which case we would recognize a loss in earnings. Our investment is at risk to the extent that one of the underlying corporate securities has a credit event that may include bankruptcy, dissolution, or insolvency of the issuers. There have been no losses associated with the trust’s underlying corporate securities. The amortized cost of our investment in the trust was approximately $189.4 million at September 30, 2003 and $180.4 million at December 31, 2002. At September 30, 2003, the fair value of the trust’s assets was $192.9 million.

     We have invested in other instruments with credit risk features. This means that these investments are at risk to the extent that the entities issuing the underlying corporate securities have credit events above specified amounts that result in a loss to the counterparty. There have been no credit events associated with the entities issuing the underlying corporate securities. For more information see note 7 to our accompanying condensed consolidated financial statements.

30


Table of Contents

     Accounts Receivable, Net

     At September 30, 2003, we had approximately $85.6 million in accounts receivable, net of allowances. The $16.1 million increase in accounts receivable, net as compared to December 31, 2002 was primarily due to an increase in sales in the last month of the quarter and a decrease in the allowance for returns. This allowance reduction is a reflection of the decrease in stock rotation experience. We have experienced a decrease in stock rotation, primarily due to a reduction in packaged product inventory held by our distributors.

     Convertible Subordinated Debentures

     In March 1999, we sold $850 million principal amount at maturity of our zero coupon convertible subordinated debentures due in March 2019. Our net proceeds were approximately $291.9 million, and the recorded debt will accrete to the principal amount at maturity through periodic charges to interest expense. Except under limited circumstances, we will pay no interest prior to maturity. The security holders can convert the debentures at any time on or before the maturity date at a conversion rate of 14.0612 shares of our common stock for each $1,000 principal amount at maturity of the debentures, subject to adjustment in certain circumstances. We can redeem the debentures on or after March 22, 2004, and the holders of the debentures can require us to repurchase the debentures on fixed dates and at set redemption prices (equal to the issue price plus accrued original issue discount) beginning on March 22, 2004. Accordingly, we classified the debentures as a current liability in our September 30, 2003 condensed consolidated balance sheet to reflect the amount that will be payable on demand within one year of the balance sheet date. We believe that with the proceeds of the held-to-maturity corporate securities that mature in March 2004 and our cash and investments on hand, we will maintain sufficient liquidity in the event that holders of the debentures require us to redeem or we elect to repurchase the debentures.

     In December 2000, we invested $158.1 million in investments accounted for as held-to-maturity corporate securities to maintain sufficient liquidity in the event that our debentures are redeemed in March 2004. Based on the $195.0 million expected maturity value of the investments in March 2004, the proceeds of the investments will be sufficient to fund the redemption of approximately 55% of the debentures, if required. We believe that we will have sufficient cash and investments to fund the redemption of the remaining debentures in 2004, if required.

     Stock Repurchase Program

     Our board of directors has authorized an ongoing stock repurchase program. In May 2003, our board of directors authorized the repurchase of an additional $200 million under our stock repurchase program, the objective of which is to manage actual and anticipated dilution. At September 30, 2003, approximately $163.9 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock.

     We are authorized to make open market purchases paid out of general corporate funds. During the three months ended September 30, 2003 we purchased 732,000 shares of outstanding commons stock on the open market for approximately $13.9 million (at an average per share price of $19.02) and during the nine months ended September 30, 2003, we purchased 2,757,000 shares of outstanding common stock on the open market for approximately $43.7 million (at an average per share price of $15.86).

     From time to time, we enter into arrangements with financial institutions as part of our stock repurchase program in order to lower our average cost to acquire shares. These arrangements are described below.

31


Table of Contents

     During 2002, we entered into an agreement, as amended, with a large financial institution in a private transaction to purchase up to 3.8 million shares of our common stock at various times through February 2003. Pursuant to the terms of the agreement, we paid $25 million to this institution during the third quarter of 2002. During 2002, we received 2,655,469 shares under this agreement with a total value of $18.5 million. The agreement matured in February 2003, and we received 390,830 additional shares with a total value of $6.5 million.

     Periodically, we enter into private structured stock repurchase transactions with a large financial institution. Under the terms of these agreements and in exchange for an up front payment, we are entitled to receive a fixed number of shares of our common stock or a predetermined cash amount upon expiration of the agreement depending on the closing price of our common stock at maturity. Pursuant to one of these transactions, during the three month period ended September 30, 2003 we received 711,458 shares of our common stock for $15 million. For aggregate up front payments of $55 million, during the nine month period ended September 30, 2003, we received a cash payment of approximately $16.7 million and we also received 2,867,298 shares upon maturity of certain of these transactions.

     In December 2002, we entered into an agreement with a large financial institution requiring that we purchase up to 1,560,000 shares of our common stock at fixed prices if our common stock traded at designated levels between December 16, 2002 and January 23, 2003. As of December 31, 2002, we had a potential repurchase obligation of approximately $9.1 million, which was classified as common stock subject to repurchase in our December 31, 2002 consolidated balance sheet. During January 2003, this agreement expired and no shares were repurchased.

     During the first quarter of 2003, we entered into a private structured stock repurchase agreement with a large financial institution. Pursuant to the terms of the agreement, we paid $25 million up front to this institution, with the ultimate number of shares repurchased dependent on market conditions. Upon expiration of the agreement in June 2003, we received 1,473,516 shares. During July 2003, we entered into two similar transactions with the same financial institution for an aggregate up front payment of $40 million. During the three months ended September 30, 2003, we received 499,057 shares under these agreements. The ultimate number of shares repurchased will be dependent on market conditions.

     During the nine months ended September 30, 2003, we sold put warrants that entitled the holder of each warrant to sell to us, generally by physical delivery, one share of our common stock at a specified price. Under the agreements, we sold 450,000 put warrants at an average exercise price of $12.57 and received premium proceeds of approximately $0.7 million. Additionally, we paid $2.5 million for the purchase of 200,000 shares upon the exercise of outstanding put warrants, while 1,200,000 put warrants expired unexercised. No put warrants were sold, exercised or expired during the three months ended September 30, 2003. As of September 30, 2003, no put warrants were outstanding.

     Commitments

     We are a party to a synthetic lease arrangement with a lessor totaling approximately $61.0 million for our 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 us. The synthetic lease qualifies as an operating lease for accounting purposes and as a financing lease for tax purposes. We do not include the property or the lease debt as an asset or a liability on our accompanying condensed consolidated balance sheet. Consequently, we include payments made pursuant to the lease are recorded as operating expenses in our condensed consolidated statements of income. We entered into the

32


Table of Contents

synthetic lease in order to lease our headquarters properties under more favorable terms than under our previous lease arrangements.

     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 the London Interbank Offered Rate, or LIBOR, plus a margin. At any time during the lease term, we have the option to sublease the property and upon thirty-days’ written notice, we have the option to purchase the property for an amount representing the original property cost and transaction fees of approximately $61.0 million plus any lease breakage costs and outstanding amounts owed. Upon at least 180 days notice prior to the termination of the initial lease term, we have the option to remarket the property for sale to a third party. If we choose not to purchase the property at the end of the lease term, we have guaranteed a residual value to the lessor of approximately $51.9 million and possession of the buildings will be returned to the lessor. If the fair value of the building were to decline below $51.9 million, we would have to make up the difference under our residual value guarantee, which could have a material adverse effect on our results of operations and financial condition.

     The synthetic lease includes certain financial covenants including a requirement for us to maintain a pledged balance of approximately $63.0 million in cash and/or investment securities as collateral. We manage the composition of the pledged investments and investment earnings are available for operating purposes. Additionally, we must maintain a minimum cash and investment balance of $100.0 million, excluding our debentures, collateralized investments and equity investments, as of the end of each fiscal quarter. As of September 30, 2003, we had approximately $217.0 million in cash and investments in excess of those required levels. The synthetic lease includes non-financial covenants, including the maintenance of the properties and adequate insurance, prompt delivery of financial statements to the lender of the lessor and prompt payment of taxes associated with the properties. As of September 30, 2003, we were in compliance with all material provisions of the arrangement.

     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. FIN No. 46 is effective for certain disclosure requirements and for variable interest entities created after February 1, 2003, and for periods ending after December 15, 2003 for all other variable interest entities. We have determined that we will not be required to consolidate the lessor, the leased facility or the related debt upon the adoption of FIN No. 46. Accordingly, we do not expect any impact on our 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, we could be required to consolidate the entity, the leased facility and the debt in a future period.

     During 2002, we took actions to consolidate certain of our offices, including the exit of certain leased office space and the abandonment of certain leasehold improvements. Lease obligations related to these existing operating leases continue until 2025 with a total remaining obligation of approximately $22.3 million, of which $4.9 million, net of anticipated sublease income, was accrued for as of September 30, 2003, and is reflected in accrued expenses in our condensed consolidated financial statements. In calculating this accrual, we made estimates, based on market information, including the estimated vacancy periods and sublease rates and opportunities. If actual circumstances prove to be different than management has estimated, the total charges for these vacant facilities could be significantly higher.

     During 2003 and 2002, significant portions of our cash inflows were generated by operations. Although we believe existing cash and investments together with cash flow expected from operations will be sufficient to meet

33


Table of Contents

operating, debt redemption and capital expenditures requirements for the next 12 months, future operating results and expected cash flow from operations could vary if we experience a decrease in customer demand or a decrease in customer acceptance of future product offerings. We could from time to time seek to raise additional funds through the issuance of debt or equity securities. We continue to search for suitable acquisition candidates and could acquire or make investments in companies we believe are related to our strategic objectives. Such investments could reduce our available working capital.

Certain Factors Which May Affect Future Results

     Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees contain “forward-looking” information that involves risks and uncertainties. In particular, statements contained in this Form 10-Q, and in the documents incorporated by reference into this Form 10-Q, that are not historical facts, including, but not limited to statements concerning new products, product development and offerings, product and price competition, product price and inventory, deferred revenues, economic and market conditions, revenue recognition, profits, growth of revenues, cost of revenues, sales, marketing and support expenses, technology relationships, reinvestment of foreign earnings, gross margins, intangible assets, impairment charges, anticipated operating and capital expenditure requirements, leasing and subleasing activities, acquisitions, debt redemption obligations, stock repurchases, investment transactions, liquidity, working capital, litigation matters, intellectual property matters, distribution channels, stock price, licensing models and potential debt or equity financings constitute forward-looking statements and are made under the safe harbor provisions of the Section 27 of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Our actual results of operations and financial condition have varied and could in the future vary significantly from those stated in any forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Form 10-Q, in the documents incorporated by reference into this Form 10-Q or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition.

Because of our relationship with Microsoft, our business could be adversely impacted by commercialization, source code access and compatibility risks.

     Our relationship with Microsoft is subject to the following risks and uncertainties, some of which could cause a material adverse effect on our business, results of operations and financial condition:

    Successful Commercialization of Microsoft Operating Systems. Our ability to successfully commercialize Citrix MetaFrame access infrastructure is directly related to Microsoft’s ability to market Windows 2000 Servers and Windows Server 2003, or collectively Windows Server Operating Systems, products. We do not have control over Microsoft’s distributors and resellers and, to our knowledge, Microsoft’s distributors and resellers are not obligated to purchase products from Microsoft. Additionally, there could be delays in the release and shipment of future versions of Windows Server Operating Systems.
 
    Termination of the Microsoft Source Licensing Agreement. In May 2002, we signed an agreement with Microsoft that provides us access to Microsoft Windows Server source code for current and future Microsoft server operating systems, including access to Windows Server 2003 and terminal services source code, during the three year term of the agreement. Microsoft could terminate the current agreement before the expiration of the three-year term for breach and upon our change of control. If Microsoft does

34


Table of Contents

      terminate the current agreement, our restricted access to source code for current and future Microsoft server operating systems could negatively impact the timing of our release of future products and enhancements.
 
    Our Agreements with Microsoft are Short in Duration. There can be no assurances that our current agreements with Microsoft will be extended or renewed by Microsoft after their respective expirations. Our failure to renew certain terms of these agreements with Microsoft in a manner favorable to us could negatively impact the timing of our release of future products and enhancements.
 
    Compatibility. Future product offerings by Microsoft may not provide for compatibility with our products, upon release of such offerings from Microsoft. The lack of compatibility between future Microsoft products and our products could negatively impact the timing of our release of future products and enhancements.

Our business could be adversely impacted by conditions affecting the information technology market in particular.

     The demand for our products depends substantially upon the general demand for business-related computer hardware and software, which fluctuates based on numerous factors, including capital spending levels, the spending levels and growth of our current and prospective customers and general economic conditions. Fluctuations in the demand for our products could have a material adverse effect on our business, results of operations and financial condition. In 2002, adverse economic conditions decreased demand for our products and negatively impacted our financial results. If the current trend of decreased and slower informational technology spending continues, it could continue to negatively impact our business, results of operations and financial condition.

Our long sales cycle for enterprise-wide sales could cause significant variability in our revenue and operating results for any particular period.

     In recent quarters, a growing number of our large and medium-sized customers have decided to implement our enterprise customer license arrangements on a department or enterprise-wide basis. Our long sales cycle for these large-scale deployments makes it difficult to predict when these sales will occur, and we may not be able to sustain these sales on a predictable basis.

     We have a long sales cycle for these enterprise-wide sales because:

    our sales force generally needs to explain and demonstrate the benefits of a large-scale deployment of our product to potential and existing customers prior to sale;
 
    our service personnel typically spend a significant amount of time assisting potential customers in their testing and evaluation of our product;
 
    our customers are typically large and medium size organizations that carefully research their technology needs and the many potential projects prior to making capital expenditures for software infrastructure; and
 
    before making a purchase, our potential customers usually must get approvals from various levels of decision makers within their organizations, and this process can be lengthy.

     The continued long sales cycle for these large-scale deployment sales could make it difficult to predict the quarter in which sales will occur. Delays in sales could cause significant variability in our revenue and operating results for any particular period.

35


Table of Contents

If we determine that any of our goodwill or intangible assets, including technology purchased in acquisitions, are impaired, we would be required to take a charge to earnings, which could have a material adverse effect on our results of operations.

     We have a significant amount of goodwill and other intangible assets, such as product and core technology, related to our acquisition of Sequoia Software Corporation. In July 2001, we adopted SFAS No. 141, Business Combinations, and in January 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. As a result, we no longer amortize goodwill and intangible assets that are deemed to have indefinite lives. However, we continue to amortize certain product and core technologies, trademarks, patents and other intangibles. We periodically evaluate our intangible assets, including goodwill, for impairment. If the actual revenues and operating profit attributable to acquired product and core technologies are less than the projections we used to initially value product and core technologies when we acquired it, such intangible assets may be deemed to be impaired. If we determine that any of our intangible assets are impaired, we would be required to take a related charge to earnings.

     At September 30, 2003, we had $22.4 million, net, of unamortized identified intangibles with estimable useful lives, of which $17.4 million consists of product and core technology we purchased in the acquisition of Sequoia. We have commercialized and currently market the Sequoia technology through our secure access infrastructure software, which includes Citrix MetaFrame Secure Access Manager. However, our channel distributors and entities with which we have technology relationships, customers or prospective customers may not purchase or widely accept our new line of products. If we fail to complete the development of our anticipated future product offerings, if we fail to complete them in a timely manner, or if we are unsuccessful in selling any new lines of products, we could determine that the value of the purchased technology is impaired in whole or in part and take a charge to earnings. We could also incur additional charges in later periods to reflect costs associated with completing those projects that could not be completed in a timely manner. An impairment charge could have a material adverse effect on our results of operations.

If we do not develop new products and enhancements to our existing products, our business, results of operations and financial condition could be adversely affected.

     The markets for our products are characterized by:

    rapid technological change;
 
    evolving industry standards;
 
    fluctuations in customer demand;
 
    changes in customer requirements; and
 
    frequent new product introductions and enhancements.

     Our future success depends on our ability to continually enhance our current products and develop and introduce new products that our customers choose to buy. If we are unable to keep pace with technological developments and customer demands by introducing new products and enhancements, our business, results of operations and financial condition could be adversely affected. Our future success could be hindered by:

    delays in our introduction of new products;
 
    delays in market acceptance of new products or new releases of our current products; and
 
    our, or a competitor’s, announcement of new product enhancements or technologies that could replace or shorten the life cycle of our existing product offerings.

36


Table of Contents

     For example, we cannot guarantee that our access infrastructure software will achieve the broad market acceptance by our channel and entities with which we have a technology relationship, customers and prospective customers necessary to generate significant revenue. In addition, we cannot guarantee that we will be able to respond effectively to technological changes or new product announcements by others. If we experience material delays or sales shortfalls with respect to our new products or new releases of our current products, those delays or shortfalls could have a material adverse effect on our business, results of operations and financial condition.

     We believe that we could incur additional costs and royalties as we develop, license or buy new technologies or enhancements to our existing products. These added costs and royalties could increase our cost of revenues and operating expenses. However, we cannot currently quantify the costs for such transactions that have not yet occurred. In addition, we may need to use a substantial portion of our cash and investments to fund these additional costs.

We face intense competition, which could result in fewer customer orders and reduced revenues and margins.

     We compete in intensely competitive markets. Some of our competitors and potential competitors have significantly greater financial, technical, sales and marketing and other resources than we do.

     For example, our ability to market the Citrix MetaFrame Access Suite, and its individual products including: Citrix MetaFrame Presentation Server, Citrix MetaFrame Secure Access Manager, Citrix MetaFrame Conferencing Manager, the Citrix MetaFrame Password Manager and other future product offerings could be affected by Microsoft’s licensing and pricing scheme for client devices, servers and applications. Further, the announcement of the release, and the actual release, of new Windows-based server operating systems or products incorporating similar features to our products could cause our existing and potential customers to postpone or cancel plans to license certain of our existing and future product offerings.

     In addition, alternative products for secure, remote access in the Internet software and hardware markets directly and indirectly compete with our current products and anticipated future product offerings. Existing or new products that extend Internet software and hardware to provide Web-based information and application access or interactive computing can materially impact our ability to sell our products in this market. Our competitors in this market include Microsoft, Oracle, Sun Microsystems, Cisco, and other makers of secure remote access solutions.

     As the markets for our products continue to develop, additional companies, including companies with significant market presence in the computer hardware, software and networking industries could enter the markets in which we compete and further intensify competition. In addition, we believe price competition could become a more significant competitive factor in the future. As a result, we may not be able to maintain our historic prices and margins, which could adversely affect our business, results of operations and financial condition.

We could change our licensing programs, which could negatively impact the timing of our recognition of revenue.

     We continually re-evaluate our licensing programs, including specific license models, delivery methods, and terms and conditions, to market our current and future products and services. We could implement new licensing programs, including offering specified and unspecified enhancements to our current and future product and service lines. Such changes could result in recognizing revenues over the contract term as opposed to upon the initial shipment or licensing of the software product. We could implement different licensing models in certain circumstances, for which we would recognize licensing fees over a longer period. Changes to our licensing

37


Table of Contents

programs, including the timing of the release of enhancements, discounts and other factors, could impact the timing of the recognition of revenue for our products, related enhancements and services and could adversely affect our operating results and financial condition.

As our international sales and operations grow, we could become increasingly subject to additional risks that could harm our business.

     We conduct significant sales and customer support operations in countries outside of the United States. For the three months ended September 30, 2003, we derived 52% and for the nine month ended September 30, 2003, we derived 53% of our revenues from sales outside the United States. Our continued growth and profitability could require us to further expand our international operations. To successfully expand international sales, we must establish additional foreign operations, hire additional personnel and recruit additional international resellers. Our international operations are subject to a variety of risks, which could cause international revenues to fluctuate. These risks include:

    fluctuations in foreign currency exchange rates, including our ability to adequately hedge our foreign exchange risks;
 
    compliance with foreign regulatory and market requirements;
 
    variability of foreign economic, political and labor conditions;
 
    changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by United States export laws;
 
    longer accounts receivable payment cycles;
 
    potentially adverse tax consequences;
 
    difficulties in protecting intellectual property; and
 
    burdens of complying with a wide variety of foreign laws.

     Our success depends, in part, on our ability to anticipate and address these risks. We cannot guarantee that these or other factors will not adversely affect our business or operating results. Further, as we generate cash flow in non-U.S. jurisdictions, if required, we may experience difficulty transferring such funds to the U.S. in a tax efficient manner. In particular, a decrease in demand for software and services in any particular region could adversely affect our future operating results.

     Our results are subject to fluctuations in foreign currency exchange rates. Changes in the value of foreign currencies in 2002 relative to the value of the U.S. dollar were generally hedged to minimize adverse impacts on our operating profit. However, since we generally hedge only one year in advance of anticipated foreign currency expenses, operations will be impacted adversely in fiscal 2003. The U.S. dollar weakened during 2002 relative to other currencies. If the value of the U.S. dollar continues to weaken relative to other currencies in which we do business, our results could be adversely affected in 2004 as well when these foreign currency expenses are converted to U.S. dollars for our financial statements.

Sales of products within our MetaFrame Access Suite constitute a substantial majority of our revenue.

     We anticipate that sales of products within our MetaFrame Access Suite and related enhancements will constitute a substantial majority of our revenue for the foreseeable future. Our ability to continue to generate revenue from our MetaFrame product line will depend on market acceptance of Windows Server Operating Systems and/or UNIX Operating Systems. Declines in demand for our MetaFrame products could occur as a result of:

38


Table of Contents

    new competitive product releases and updates to existing products,
 
    price competition,
 
    technological change,
 
    decreasing or stagnant information technology spending levels,
 
    general economic conditions, or
 
    lack of success of entities with which we have a technology relationship.

     If our customers do not continue to purchase our MetaFrame products as a result of these or other factors, our revenue would decrease and our results of operations and financial condition would be adversely affected.

Our synthetic lease is an off-balance sheet arrangement that could negatively affect our financial condition and results.

     In April 2002, we entered into a seven-year synthetic lease with a lessor for our headquarters office buildings in Fort Lauderdale, Florida. The synthetic lease qualifies for operating lease accounting treatment under SFAS No. 13, Accounting for Leases, so we do not include the property or the lease debt on our consolidated balance sheet. 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. FIN No. 46 is effective for certain disclosure requirements and for variable interest entities created after February 1, 2003, and for periods ending after December 15, 2003 for all other variable interest entities. We have determined that we will not be required to consolidate the lessor entity, the leased facility or the related debt upon the adoption of FIN No. 46. Accordingly, we do not expect any impact on our financial position, results of operations or cash flows from adoption. However, if the lessor were to change its ownership of our property or significantly change its ownership of other properties that it currently holds, we could be required to consolidate the entity, the leased facility and the debt in a future period.

     If we elect not to purchase the property at the end of the lease term, we have guaranteed a minimum residual value of approximately $51.9 million to the lessor. Therefore, if the fair value of the property declines below $51.9 million, we would have to make up the difference under our residual value guarantee, which could have a material adverse effect on our results of operations and financial condition. For further information on our synthetic lease, please refer to “Liquidity and Capital Resources” and note 12 to our condensed consolidated financial statements.

Our proprietary rights could offer only limited protection. Our products could infringe third-party intellectual property rights, which could result in material costs.

     Our efforts to protect our proprietary rights may not be successful. We rely primarily on a combination of copyright, trademark, patent and trade secret laws, confidentiality procedures and contractual provisions, to protect our proprietary rights. The loss of any material trade secret, trademark, trade name, patent or copyright could have a material adverse effect on our business. Despite our precautions, it could be possible for unauthorized third parties to copy or reverse engineer certain portions of our products or to otherwise obtain and use our proprietary information. If we cannot protect our proprietary technology against unauthorized copying or use, we may not remain competitive. Any patents owned by us could be invalidated, circumvented or challenged. Any of our pending or future patent applications, whether or not being currently challenged, may not be issued with the scope we seek, if at all, and if issued, may not provide any meaningful protection or competitive advantage.

39


Table of Contents

     In addition, our ability to protect our proprietary rights could be affected by:

    Differences in International Law; Enforceability of Licenses. The laws of some foreign countries do not protect our intellectual property to the same extent as do the laws of the United States and Canada. For example, we derive a significant portion of our sales from licensing our packaged products under “shrink wrap” or “click-to-accept” license agreements that are not signed by licensees and electronic enterprise customer licensing arrangements that could be unenforceable under the laws of certain foreign jurisdictions.
 
    Third Party Infringement Claims. As we expand our product lines and the number of products and competitors in our industry segments increase and the functionality of these products overlap, we could become increasingly subject to infringement claims. Companies and inventors are more frequently seeking to patent software and business methods because of developments in the law that could extend the ability to obtain such patents. As a result, we could receive patent infringement claims. Responding to any infringement claim, regardless of its validity, could result in costly litigation; injunctive relief or require us to obtain a license to intellectual property rights of those third parties. Licenses may not be available on reasonable terms, on terms compatible with the protection of our proprietary rights, or at all. In addition, attention to these claims could divert our management’s time and attention from developing our business. If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations, financial condition or cash flows could be materially adversely affected.

We are subject to risks associated with our technology relationships.

     Our business depends on technology relationships. We cannot assure you that those relationships will continue in the future. In addition to our relationship with Microsoft, we rely on technology relationships with such companies as IBM, HP, Dell and others. We depend on the entities with which we have technology relationships to successfully test our products, to incorporate our technology into their products and to market and sell those products. We cannot assure you that we will be able to maintain our current technology relationships or to develop additional technology relationships. If any entities in which we have a technology relationship are unable to incorporate our technology into their products or to market or sell those products, our business, operating results and financial condition could be materially adversely affected.

If we lose access to third party licenses, releases of our products could be delayed.

     We believe that we will continue to rely, in part, on third party licenses to enhance and differentiate our products. Third party licensing arrangements are subject to a number of risks and uncertainties, including:

    undetected errors or unauthorized use of another person’s code in the third party’s software;
 
    disagreement over the scope of the license and other key terms, such as royalties payable; and
 
    infringement actions brought by third party licensees;
 
    termination or expiration of the license.

     If we lose or are unable to maintain any of these third party licenses or are required to modify software obtained under third party licenses, it could delay the release of our products. Any delays could have a material adverse effect on our business, results of operations and financial condition.

40


Table of Contents

Our success depends on our ability to attract and retain large enterprise customers.

     We must retain and continue to expand our ability to reach and penetrate large enterprise customers by adding effective channel distributors and expanding our consulting services. Our inability to attract and retain large enterprise customers could have a material adverse effect on our business, results of operations and financial condition. Large enterprise customers usually request special pricing and generally have longer sales cycles, which could negatively impact our revenues. By granting special pricing, such as bundled pricing or discounts, to these large customers, we may have to defer recognition of some portion of the revenue from such sales. This deferral could reduce our revenues and operating profits for a given reporting period. Additionally, as we attempt to attract and penetrate large enterprise customers, we may need to increase corporate branding and marketing activities, which could increase our operating expenses. These efforts may not proportionally increase our operating revenues and could reduce our profits.

Our business could be adversely affected if we are unable to expand and diversify our distribution channels.

     We intend to continue to expand our distribution channels by leveraging our relationships with independent hardware and software vendors and system integrators to encourage them to recommend or distribute our products. In addition, an integral part of our strategy is to diversify our base of channel relationships by adding more channel members with abilities to reach larger enterprise customers. This will require additional resources, as we will need to expand our internal sales and service coverage of these customers. If we fail in these efforts and cannot expand or diversify our distribution channels, our business could be adversely affected. In addition to this diversification of our base, we will need to maintain a healthy mix of members who cater to smaller customers. We could need to add and remove distribution members to maintain customer satisfaction and a steady adoption rate of our products, which could increase our operating expenses. We are currently investing, and intend to continue to invest, significant resources to develop these channels, which could reduce our profits.

If we do not generate sufficient cash flow from operations in the future, we may not be able to fund our operations and fulfill our future obligations.

     Our ability to generate sufficient cash flow from operations to fund our product development and offerings and make payments on our debt and other obligations depends on a range of economic, competitive and business factors, many of which are outside our control. We cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to liquidate our investments, sell assets or raise equity when needed or desirable. An inability to fund our operations or fulfill outstanding obligations could have a material adverse effect on our business, financial condition and results of operations. For further information, please refer to “Liquidity and Capital Resources.”

We rely on indirect distribution channels and major distributors that we do not control.

     We rely significantly on independent distributors and resellers to market and distribute our products. We do not control our distributors and resellers. Additionally, our distributors and resellers are not obligated to buy our products and could also represent other lines of products. Some of our distributors and resellers maintain inventories of our packaged products for resale to smaller end-users. If distributors and resellers reduce their inventory of our packaged products, our business could be adversely affected. In the quarter ended September 30, 2003 we believe that our distributors and resellers held smaller inventories of packaged products as compared to inventories they held in prior quarters. Further, we could maintain individually significant accounts receivable balances with certain distributors. The financial condition of our distributors could deteriorate and distributors could

41


Table of Contents

significantly delay or default on their payment obligations. Any significant delays or defaults could have a material adverse effect on our business, results of operations and financial condition.

Our products could contain errors that could delay the release of new products and may not be detected until after our products are shipped.

     Despite significant testing by us and by current and potential customers, our products, especially new products or releases, could contain errors. In some cases, these errors may not be discovered until after commercial shipments have been made. Errors in our products could delay the development or release of new products and could adversely affect market acceptance of our products. Additionally, our products depend on third party products, which could contain defects and could reduce the performance of our products or render them useless. Because our products are often used in mission-critical applications, errors in our products or the products of third parties upon which our products rely could give rise to warranty or other claims by our customers.

Acquisitions present many risks, and we may not realize the financial and strategic goals we anticipate at the time of an acquisition.

     Acquisitions, including those of high-technology companies are inherently risky. We cannot assure anyone that our previous acquisitions, or any future acquisitions will be successful in helping us reach our financial and strategic goals either for that acquisition or for us generally. The risks we commonly encounter are:

    difficulties integrating the operations, technologies, and products of the acquired companies;
 
    undetected errors or unauthorized use of a third-party’s code in products of the acquired companies;
 
    the risk of diverting management’s attention from normal daily operations of the business;
 
    potential difficulties in completing projects associated with purchased in-process research and development;
 
    risks of entering markets in which we have no or limited direct prior experience and where competitors have stronger market positions;
 
    the potential loss of key employees of the acquired company; and
 
    an uncertain sales and earnings stream from the acquired company, which could unexpectedly dilute our earnings.

     These factors could have a material adverse effect on our business, results of operations and financial condition. We cannot guarantee that the combined company resulting from any acquisition can continue to support the growth achieved by the companies separately. We must also focus on our ability to manage and integrate any acquisition. Our failure to manage growth effectively and successfully integrate acquired companies could adversely affect our business and operating results.

If we lose key personnel or cannot hire enough qualified employees, our ability to manage our business could be adversely affected.

     Our success depends, in large part, upon the services of a number of key employees. We do not have long-term employment agreements with any of our key personnel. Any officer or employee can terminate his or her relationship with us at any time. The effective management of our growth, if any, could depend upon our ability to retain our highly skilled technical, managerial, finance and marketing personnel. If any of those employees leave, we will need to attract and retain replacements for them. We also need to add key personnel in the future. The market for these qualified employees is competitive. We could find it difficult to successfully attract, assimilate or retain sufficiently qualified personnel in sufficient numbers. Also, we could need to hire additional personnel to

42


Table of Contents

develop new products, product enhancements and technologies. If we cannot add the necessary staff and resources, our ability to develop future enhancements and features to our existing or future products could be delayed. Any delays could have a material adverse effect on our business, results of operations and financial condition.

If stock balancing returns or price adjustments exceed our reserves, our operating results could be adversely affected.

     We provide most of our distributors with stock balancing return rights, which generally permit our distributors to return products to us, subject to ordering an equal dollar amount of our products. We also provide price protection rights to most of our distributors. Price protection rights require that we grant retroactive price adjustments for inventories of our products held by distributors if we lower our prices for those products within a specified time period. To cover our exposure to these product returns and price adjustments, we establish reserves based on our evaluation of historical product trends and current marketing plans. However, we cannot assure you that our reserves will be sufficient to cover our future product returns and price adjustments. If we inadequately forecast reserves, our operating results could be adversely affected.

Political and social turmoil could adversely impact our business.

     Political and social turmoil, including terrorist and military actions, can be expected to put further pressure on economic conditions in the United States and foreign jurisdictions. These conditions make it difficult for us, and our customers, to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and results of operations.

Our stock price could be volatile, and you could lose the value of your investment.

     Our stock price has been volatile and has fluctuated significantly to date. The trading price of our stock is likely to continue to be highly volatile and subject to wide fluctuations. Your investment in our stock could lose value. Some of the factors that could significantly affect the market price of our stock include:

    actual or anticipated variations in operating and financial results;
 
    analyst reports or recommendations;
 
    changes in interest rates; and
 
    other events or factors, many of which are beyond our control.

     The stock market in general, The Nasdaq National Market and the market for software companies and technology companies in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors could materially and adversely affect the market price of our stock, regardless of our actual operating performance.

If we fail to manage our operations or fail to continue to effectively control expenses, our future operating results could be adversely affected.

     Historically, the scope of our operations, the number of our employees and the geographic area of our operations have grown rapidly. In addition, we have acquired both domestic and international companies. This growth and the assimilation of acquired operations and their employees could continue to place a significant strain on our managerial, operational and financial resources. To manage our growth, if any, effectively, we need to continue to implement and improve additional management and financial systems and controls. We may not be able to manage the current scope of our operations or future growth effectively and still exploit market opportunities for our

43


Table of Contents

products and services in a timely and cost-effective way. Our future operating results could also depend on our ability to manage:

    our expanding product line,
 
    our marketing and sales organizations, and
 
    our client support organization as installations of our products increase.

     We took steps to reduce operating expenses commencing in the fourth quarter of 2002, however our operating expenses in 2003 could exceed our operating expenses in 2002. An increase in operating expenses could reduce our income from operations and cash flows from operating activities in the future.

Our business and investments could be adversely impacted by unfavorable economic conditions.

     General economic and market conditions, and other factors outside our control, could adversely affect our business and impair the value of our investments. Any further downturn in general economic conditions could result in a reduction in demand for our products and services and could harm our business. In addition, an economic downturn could result in an impairment in the value of our investments requiring us to record losses related to such investments. Impairment in the value of these investments may disrupt our ongoing business and distract management. As of September 30, 2003, we had $546.2 million of short and long-term investments with various issuers and financial institutions. In many cases we do not attempt to reduce or eliminate our market exposure on these investments and could incur losses related to the impairment of these investments. Fluctuations in economic and market conditions could adversely affect the value of our investments, and we could lose some of our investment portfolio. A total loss of an investment could adversely affect our results of operations and financial condition. For further information on these investments, please refer to “Liquidity and Capital Resources.”

Our revenue may not grow, and if we do not continue to successfully manage our expenses, our business could be negatively impacted.

     We attribute most of our growth during recent years to the introduction of the MetaFrame software for Windows operating systems in mid-1998. We cannot assure you that the access infrastructure software markets, in which we operate, will grow. We cannot assure that the release of our access infrastructure software suite, including the MetaFrame Secure Access Manager, or other new products will increase our revenue growth rate.

     In addition, to the extent our revenue grows, if at all, we believe that our cost of revenues and certain operating expenses could also increase. We cannot assure you that our operating expenses will be lower than our estimated or actual revenues in any given quarter. If we experience a shortfall in revenue in any given quarter, we likely will not be able to further reduce operating expenses quickly in response. Any significant shortfall in revenue could immediately and adversely affect our results of operations for that quarter. Also, due to the fixed nature of many of our expenses and our current expectation for revenue growth, our income from operations and cash flows from operating and investing activities could be lower than in recent years.

44


Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There have been no material changes with respect to the information on Quantitative and Qualitative Disclosures About Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES

     As of September 30, 2003, the Company’s management, with the participation of the Company’s Chief Executive Officer and the Company’s Vice President and Chief Financial Officer, evaluated the effectiveness of the Company’s 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 Company’s Chief Executive Officer and the Company’s Vice President and Chief Financial Officer concluded that, as of September 30, 2003, the Company’s disclosure controls and procedures were effective in ensuring that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

45


Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     The Company is a defendant in various matters of litigation generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate liability would not materially affect the Company’s financial position, result of operations or cash flows.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     
(a)   List of exhibits
             
    Exhibit No.   Description
   
 
      10.1     Second Amended and Restated 2000 Director and Officer Stock Option Plan dated May 15, 2003 (filed herewith).
             
      31.1     Rule 13a-14(a) / 15d-14(a) Certification
             
      31.2     Rule 13a-14(a) / 15d-14(a) Certification
             
      32.1     Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
(b)   On July 23, 2003, the Company furnished a report on Form 8-K to the Securities and Exchange Commission. That report on Form 8-K, furnished pursuant to Item 9 of that form, stated that, on July 23, 2003, the Company reported its earnings for the three and six months ended June 30, 2003.
     
    The Company did not file nor furnish any other reports on Form 8-K during the third fiscal quarter of 2003.

46


Table of Contents

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 10th day of November 2003.

     
    CITRIX SYSTEMS, INC.
     
    By: /s/ DAVID J. HENSHALL
   
    David J. Henshall
Vice President and Chief Financial Officer
(Authorized Officer and Principal Financial Officer)

47


Table of Contents

EXHIBIT INDEX

     
Exhibit No.   Description

 
10.1   Second Amended and Restated 2000 Director and Officer Stock Option Plan dated May 15, 2003 (filed herewith).
     
31.1   Rule 13a-14(a) / 15d-14(a) Certification
     
31.2   Rule 13a-14(a) / 15d-14(a) Certification
     
32.1   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002

48