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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 OCTOBER 3,
1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO
_______.
COMMISSION FILE NUMBER 0-17781
- --------------------------------------------------------------------------------
SYMANTEC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0181864
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10201 TORRE AVENUE, CUPERTINO, CALIFORNIA 95014-2132
(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code:(408) 253-9600
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 [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, including 2,580,153 shares of Delrina exchangeable stock, as of
October 27, 1997:
COMMON STOCK, PAR VALUE $0.01 PER SHARE 56,276,053 SHARES
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SYMANTEC CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED OCTOBER 3, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
as of September 30, 1997 and March 31, 1997.......................... 3
Consolidated Statements of Income
for the three and six months ended September 30, 1997 and 1996....... 4
Consolidated Statements of Cash Flow
for the six months ended September 30, 1997 and 1996................. 5
Notes to Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 21
Item 4: Submission of Matters to a Vote of Security Holders..................... 21
Item 5: Other Information....................................................... 21
Item 6. Exhibits and Reports on Form 8-K........................................ 22
Signatures...................................................................... 23
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMANTEC CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
(In thousands) 1997 1997
--------- ---------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and short-term investments $ 176,705 $ 160,082
Trade accounts receivable 55,893 47,650
Inventories 2,310 4,476
Deferred income taxes 12,775 12,823
Other 13,367 13,166
--------- ---------
Total current assets 261,050 238,197
Long-term investments 33,170 --
Capitalized software 1,810 2,037
Equipment and leasehold improvements 51,760 51,610
Restricted investments 51,539 47,448
Other 2,940 2,381
--------- ---------
$ 402,269 $ 341,673
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,230 $ 30,328
Accrued compensation and benefits 20,901 16,241
Other accrued expenses 60,119 53,742
Income taxes payable 13,339 8,276
Current portion of long-term obligations 38 41
--------- ---------
Total current liabilities 125,627 108,628
Convertible subordinated debentures 15,000 15,000
Long-term obligations 107 66
Commitments and contingencies
Stockholders' equity:
Preferred stock (authorized: 1,000 shares; issued and outstanding: none) -- --
Common stock (authorized: 100,000; issued and outstanding: 56,198
and 55,427 shares) 562 554
Capital in excess of par value 298,095 291,548
Notes receivable from stockholders (144) (144)
Cumulative translation adjustment (9,694) (7,580)
Accumulated deficit (27,284) (66,399)
--------- ---------
Total stockholders' equity 261,535 217,979
--------- ---------
$ 402,269 $ 341,673
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
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SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
(In thousands, except per share data; unaudited) 1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 139,013 $ 109,178 $ 274,029 $ 218,396
Cost of revenues 22,389 20,730 43,309 42,214
--------- --------- --------- ---------
Gross margin 116,624 88,448 230,720 176,182
Operating expenses:
Research and development 23,591 20,835 45,172 43,841
Sales and marketing 61,279 52,967 122,934 106,746
General and administrative 9,024 7,826 18,058 15,093
Acquisition, restructuring and
other expenses -- 7,290 -- 8,585
--------- --------- --------- ---------
Total operating expenses 93,894 88,918 186,164 174,265
--------- --------- --------- ---------
Operating income (loss) 22,730 (470) 44,556 1,917
Interest income 3,261 1,751 6,168 3,435
Interest expense (322) (337) (579) (668)
Other income (expense), net 1,058 36 654 (332)
--------- --------- --------- ---------
Income before income taxes 26,727 980 50,799 4,352
Provision for income taxes 6,147 98 11,684 435
--------- --------- --------- ---------
Net income $ 20,580 $ 882 $ 39,115 $ 3,917
========= ========= ========= =========
Net income per share - primary $ 0.35 $ 0.02 $ 0.68 $ 0.07
========= ========= ========= =========
Net income per share - fully diluted $ 0.35 $ 0.02 $ 0.66 $ 0.07
========= ========= ========= =========
Shares used to compute net income
per share - primary 58,758 54,951 57,942 55,042
========= ========= ========= =========
Shares used to compute net income
per share - fully diluted 60,010 54,951 59,765 55,042
========= ========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended
September 30,
------------------------
(In thousands; unaudited) 1997 1996
--------- --------
<S> <C> <C>
Operating Activities:
Net income $ 39,115 $ 3,917
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of equipment and
leasehold improvements 12,602 11,953
Amortization and write-off of capitalized software costs 687 2,684
Write-off of equipment and leasehold improvements 1,092 2,441
Deferred income taxes 62 181
Net change in assets and liabilities:
Trade accounts receivable (9,511) (10)
Inventories 2,043 5,446
Other current assets (308) 1,138
Capitalized software costs (6) (5,228)
Other assets (581) 2,272
Accounts payable 1,688 (27)
Accrued compensation and benefits 4,728 2,014
Other accrued expenses 6,897 (3,159)
Income taxes payable 5,276 (660)
--------- --------
Net cash provided by operating activities 63,784 22,962
--------- --------
Investing Activities:
Capital expenditures (14,372) (16,274)
Purchased intangibles (481) (214)
Purchases of marketable securities (120,539) (95,000)
Proceeds from sales of marketable securities 81,580 66,751
Purchases of restricted investments (4,091) --
--------- --------
Net cash used in investing activities (57,903) (44,737)
--------- --------
Financing Activities:
Repurchase of Company's common stock (8,373) --
Net proceeds from sales of common stock and other 14,969 4,314
--------- --------
Net cash provided by financing activities 6,596 4,314
Effect of exchange rate fluctuations on cash and cash equivalents (1,643) 291
--------- --------
Increase (decrease) in cash and cash equivalents 10,834 (17,170)
Beginning cash and cash equivalents 95,758 41,777
--------- --------
Ending cash and cash equivalents $ 106,592 $ 24,607
========= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements of Symantec Corporation ("Symantec" or the
"Company") as of September 30, 1997 and for the three and six months ended
September 30, 1997 and 1996 are unaudited and, in the opinion of management,
contain all adjustments, consisting of only normal recurring items necessary for
the fair presentation of the financial position and results of operations for
the interim periods. These consolidated financial statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included in Symantec's Annual Report on Form 10-K for the year ended March 31,
1997. The results of operations for the three and six months ended September 30,
1997 are not necessarily indicative of the results to be expected for the entire
year. All significant intercompany accounts and transactions have been
eliminated. Certain previously reported amounts have been reclassified to
conform to the current presentation format.
Symantec has a 52/53-week fiscal accounting year. Accordingly, all references as
of and for the periods ended September 30, 1997, March 31, 1997 and September
30, 1996 reflect amounts as of and for the periods ended October 3, 1997, March
28, 1997 and September 27, 1996, respectively.
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
September 30, March 31,
(In thousands) 1997 1997
--------- ---------
(unaudited)
<S> <C> <C>
Cash and short-term investments:
Cash $ 41,355 $ 33,755
Cash equivalents 65,237 62,003
Short-term investments 70,113 64,324
--------- ---------
$ 176,705 $ 160,082
========= =========
Trade accounts receivable:
Receivables $ 60,220 $ 51,950
Less: allowance for doubtful accounts (4,327) (4,300)
--------- ---------
$ 55,893 $ 47,650
========= =========
Inventories:
Raw materials $ 1,053 $ 1,736
Finished goods 1,257 2,740
--------- ---------
$ 2,310 $ 4,476
========= =========
Equipment and leasehold improvements:
Computer equipment $ 99,391 $ 91,533
Office furniture and equipment 28,746 27,706
Leasehold improvements 20,386 17,697
--------- ---------
148,523 136,936
Less: accumulated depreciation and amortization (96,763) (85,326)
--------- ---------
$ 51,760 $ 51,610
========= =========
Capitalized software:
Purchased product rights $ 1,072 $ 591
Capitalized software costs 2,470 2,465
Less: accumulated amortization of purchased product rights (354) (55)
Less: accumulated amortization of capitalized software costs . (1,378) (964)
--------- ---------
$ 1,810 $ 2,037
========= =========
Other accrued expenses:
Deferred revenue $ 19,231 $ 13,825
Marketing development funds 11,808 12,529
Other 29,080 27,388
--------- ---------
$ 60,119 $ 53,742
========= =========
</TABLE>
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3. ACQUISITION, RESTRUCTURING AND OTHER EXPENSES
Acquisition, restructuring and other expenses consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
(In thousands) 1997 1996 1997 1996
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Write off of investment in joint venture $ -- $1,750 $ -- $1,750
Write off of in-process research and
development costs -- 3,050 -- 3,050
Centralization, restructuring and other -- 2,490 -- 3,185
Fast Track, Inc. acquisition -- -- -- 600
---------- ------ ---------- ------
Total acquisition, restructuring and
other expenses $ -- $7,290 $ -- $8,585
========== ====== ========== ======
</TABLE>
During the quarter ended September 30, 1996, Symantec recorded a $1.8 million
charge in connection with the write off of an investment in a joint venture and
a $3.1 million charge in connection with the acquisition of certain in-process
software development technology.
During the quarter ended September 30, 1996, Symantec recorded $2.5 million for
costs related to the restructuring of certain domestic and international sales
and research and development operations. During the quarter ended June 30, 1996,
Symantec also recorded $0.7 million for costs related to the centralization of
certain research and development activities, litigation settlement costs and
other non-recurring expenses.
Symantec recorded total acquisition charges of $0.6 million in the quarter ended
June 30, 1996 in connection with the acquisition of Fast Track, Inc. The charges
included $0.4 million for legal, accounting and financial advisory services and
$0.2 million for the consolidation and discontinuance of certain operational
activities and other acquisition related expenses.
NOTE 4. LITIGATION AND CONTINGENCIES
On March 18, 1996, a class action complaint was filed by the law firm of
Milberg, Weiss, Bershad, Hynes & Lerach in Superior Court of the State of
California, County of Santa Clara, against the Company and several of its
current and former officers and directors. The complaint alleges that Symantec
insiders inflated the stock price and then sold stock based on inside
information that sales were not going to meet analysts' expectations. The
complaint seeks damages in an unspecified amount. The complaint has been refiled
twice in state court, most recently on January 10, 1997, to reflect changes
brought about by Symantec's demurrer to previous complaints. On January 7, 1997,
the same plaintiffs filed a complaint in federal court based on the same facts
as the state court complaint, for violation of the Securities Exchange Act of
1934. Symantec believes that neither the state court complaint nor the federal
court complaint has any merit and will vigorously defend itself against both
complaints.
On April 10, 1997, Trio Systems LLC filed a lawsuit in the United States
District Court, Central District of California, against Symantec, for damages,
injunctive and declaratory relief and for the imposition of a constructive trust
claiming copyright infringement, fraud, misrepresentation and breach of
contract, based on Symantec's alleged inclusion, in its Norton Utilities, Norton
Your Eyes Only and pcANYWHERE products, of Trio's C-Index code. Symantec
believes these claims have no merit and intends to defend this action
vigorously.
On April 23, 1997, Symantec filed a lawsuit against McAfee Associates, Inc.
("McAfee") in the United States District Court, Northern District of California,
for copyright infringement and unfair competition. On October 6, 1997, the court
found that Symantec had demonstrated a likelihood of success on the merits of
certain copyright claims, and issued a preliminary injunction (i) prohibiting
McAfee from infringing Symantec's rights in specified
8
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
materials by marketing, selling, transferring or directly or indirectly copying
into any new product or new version of an existing product that have Symantec
code, (ii) requiring McAfee to notify distributors who are still selling
versions of PC Medic 97 that have Symantec's code to tell customers that they
should upgrade to versions that do not contain Symantec code, and (iii)
requiring McAfee to provide Symantec and the court with a sample of the notice
to be used. On October 17, 1997, Symantec amended its complaint to include
additional claims for copyright infringement and misappropriation of trade
secrets, based on additional evidence found in the discovery process. Symantec
continues to investigate the extent to which McAfee may have misappropriated
Symantec's intellectual property, and plans to aggressively pursue its remedies
under this lawsuit, which include both injunctive relief and monetary damages.
On May 13, 1997, Trend Micro Incorporated filed a lawsuit in the United States
District Court, Northern District of California, against Symantec Corporation
and McAfee Associates, alleging that the Symantec product known as Norton
AntiVirus for Internet E-mail Gateways infringes U.S. Patent No. 5,623,600,
owned by Trend. Trend also appears to intend to assert a similar claim with
respect to the Symantec product known as Norton AntiVirus for Firewalls. The
lawsuit requests damages, injunctive relief and costs and attorney fees.
Symantec believes this claim has no merit and intends to defend the action
vigorously.
On August 22, 1997, McAfee filed a lawsuit against Symantec in the Superior
Court of the State of California, County of Santa Clara, alleging defamation,
trade libel, unfair competition and unjust enrichment. The complaint alleges
that damages to McAfee could result in damages of $1 billion. Symantec has filed
a demurrer to the complaint, seeking to have it dismissed on the basis that it
is legally insufficient, and a motion seeking to have the complaint dismissed as
an improper attempt to prevent Symantec from exercising its legal right to
comment publicly upon the lawsuit filed by Symantec against McAfee that is
described above. A hearing on Symantec's motions to dismiss the case is
scheduled for January 13, 1998. Symantec believes that the lawsuit filed by
McAfee has no merit and intends to defend the action vigorously.
On September 15, 1997, Hilgraeve Corporation filed a lawsuit in the United
States District Court, Eastern District of Michigan, against Symantec
Corporation, alleging that unspecified Symantec products infringe U.S. Patent
No. 5,319,776, owned by Hilgraeve. The lawsuit requests damages, injunctive
relief and costs and attorney fees. Symantec believes this claim has no merit
and intends to defend the action vigorously.
Over the past few years, it has become common for software companies, including
Symantec, to receive claims of patent infringement. Symantec is currently
evaluating claims of patent infringement asserted by several parties, including
IBM, with respect to certain of the Company's products. While the Company
believes that it has valid defenses to these claims, there can be no assurance
that the outcome of any related litigation or negotiation would not have a
material adverse impact on the Company's future results of operations or cash
flows.
Symantec is involved in a number of other judicial and administrative
proceedings incidental to its business. The Company intends to defend all of the
aforementioned pending lawsuits vigorously and although adverse decisions (or
settlements) may occur in one or more of the cases, the final resolution of
these lawsuits, individually or in the aggregate, is not expected to have a
material adverse effect on the financial position of the Company. However,
depending on the amount and timing of an unfavorable resolution of these
lawsuits, it is possible that the Company's future results of operations or cash
flows could be materially adversely affected in a particular period. The Company
has accrued certain estimated legal fees and expenses related to certain of
these matters, however, actual amounts may differ materially from those
estimated amounts.
NOTE 5. STOCK REPURCHASE
On April 29, 1997, the Board of Directors of Symantec authorized the repurchase
of up to 1,000,000 shares of Symantec common stock by June 13, 1997. As of June
13, 1997, management completed the repurchase of 500,000 shares at prices
ranging from $16.57 to $17.00 per share.
9
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
(SFAS) No. 128, "Earnings per Share", which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. The application of SFAS 128 new "basic earnings per share" calculation
results in basic earnings per share of $0.37 and $0.02 for the quarters ended
September 30, 1997 and September 30, 1996, respectively. The Company does not
expect the new diluted calculation to be materially different from primary and
fully diluted earnings per share. The application of SFAS 128 basic earnings per
share calculation results in basic earnings per share of $0.70 and $0.07 for the
six months ended September 30, 1997 and September 30, 1996, respectively. The
Company does not expect the new diluted calculation to be materially different
from primary and fully diluted earnings per share for the six months ended
September 30, 1997 and September 30, 1996.
In June 1997, the Financial Accounting Standards Board issued Statement (SFAS)
No. 130, "Reporting Comprehensive Income", which establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements and is required to be adopted by
Symantec beginning in fiscal 1999. Additionally, the Financial Accounting
Standards Board issued Statement (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards for the way
that public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas and major customers. SFAS 131 will be effective for Symantec
for fiscal 1999 and will apply to both annual and interim financial reporting
subsequent to this date. Symantec is evaluating the potential impact of these
accounting pronouncements on required disclosures.
In January 1997, the SEC issued new disclosure rules related to derivatives and
exposures to market risk from derivative financial instruments. These new
disclosure rules have two parts. A requirement for market risk disclosures (both
quantitative and qualitative) outside the financial statements and a requirement
for expanded accounting policy disclosures for derivatives in the notes to the
financial statements. These disclosures will be required to be adopted by
Symantec beginning in fiscal year-end 1999 and the September 1997 quarter,
respectively. Management is currently evaluating the implication of the required
market risk disclosures outside the financial statements. The expanded
accounting policy disclosure for derivatives is as follows:
Symantec utilizes some natural hedging to mitigate the Company's transaction
exposures and hedges some residual transaction exposures through the use of
one-month foreign exchange forward contracts. The Company enters into foreign
exchange forward contracts with financial institutions primarily to protect
against currency exchange risks associated with certain firmly committed
transactions. All foreign exchange forward contracts are designated effective as
a hedge and are highly correlated inversely to the hedged item as required by
generally accepted accounting principles.
Gains and losses on the contracts are included in other income in the same
period as gains and losses on the underlying transactions are recognized and
generally offset. Gains and losses on any instruments not meeting the criteria
as a hedge would be recognized in other income in the current period. If an
underlying hedged transaction is terminated earlier than initially anticipated,
the offsetting gain or loss on the related derivative instrument is recognized
in other income in the same period. The fair value of foreign currency exchange
forward contracts approximates cost due to the short maturity periods.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Symantec develops, markets and supports a diversified line of application and
system software products designed to enhance individual and workgroup
productivity. Symantec's business strategy is to satisfy customer needs by
developing and marketing products across multiple operating platforms that make
customers productive and keep their computers safe and reliable - anywhere,
anytime.
Founded in 1982, the Company has offices in the United States, Canada, Asia,
Australia, Europe, Africa and Latin America.
Symantec has a 52/53-week fiscal accounting year.
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, and section
27A of the Securities Act of 1933, as amended. These forward-looking statements
are subject to significant risks and uncertainties, including those identified
in the section "Factors That May Affect Future Results" and in the Company's
annual report on Form 10-K for the year ended March 31, 1997, and may cause
actual results to differ materially from those discussed in such forward-looking
statements. The forward-looking statements within this Form 10-Q are identified
by words such as "believes," "anticipates," "expects," "intends," "may" and
other similar expressions. In addition, any statements which refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
occurring subsequent to the filing of this Form 10-Q with the Securities and
Exchange Commission. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission, including its
Form 10-K, that attempt to advise interested parties of the risks and factors
that may affect the Company's business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RAPID TECHNOLOGICAL CHANGE AND DEVELOPMENT RISKS. The Company participates in a
highly dynamic industry. Future technology or market changes may cause certain
of Symantec's products to become obsolete more quickly than expected. The trend
towards server-based applications in networks and applications distributed over
the Internet could have a material adverse effect on sales of the Company's
products. The impact of diminished market acceptance and adoption rate of
Symantec's products may result in reduced revenues, gross margins and net
income, as well as significant increases in the volatility of Symantec's stock
price.
STOCK PRICE VOLATILITY. The Company's earnings and stock price have been and may
continue to be subject to significant volatility, particularly on a quarterly
basis. Symantec has previously experienced shortfalls in revenue and earnings
from levels expected by securities analysts and investors, which has had an
immediate and significant adverse effect on the trading price of the Company's
common stock. This may occur again in the future. Additionally, as a significant
portion of the Company's revenues often occur late in the quarter, the Company
may not learn of revenue shortfalls until late in the fiscal quarter, which
could result in an even more immediate and adverse effect on the trading price
of the Company's common stock.
PERSONAL COMPUTER AND HARDWARE GROWTH RATES. Fluctuations in customer spending
from software to hardware as the result of technological advancements in
hardware or price reductions of hardware have in the past, and may in the
future, result in reduced revenues which would have a material adverse effect on
operating results.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. While Symantec's diverse product
line has tended to lessen fluctuations in quarterly net revenues, these
fluctuations have occurred in the past and are likely to occur in the future.
These fluctuations may be caused by a number of factors, including the
introduction of competitive products by competitors, the timing of new product
introductions by Symantec and market acceptance of such products, reduced demand
for any given product, seasonality in the retail software market, the market's
transition between operating systems, the impact of the Internet and general
economic conditions. These factors may cause significant fluctuations in net
revenues and, accordingly, operating results.
MANAGEMENT OF EXPANDING OPERATIONS. Symantec continually evaluates its product
and corporate strategy and has in the past and will in the future undertake
organizational changes and product and marketing strategy modifications which
are designed to maximize market penetration, maximize use of limited corporate
resources and develop new products and product channels. These organizational
changes increase the risk that objectives will not be met due to the allocation
of valuable limited resources to implement changes. Further, due to the
uncertain nature of any of these undertakings, there can be no assurance that
these efforts will be successful or that the Company will realize any benefit
from these efforts.
Symantec has completed a number of acquisitions and may acquire other companies
in the future. Acquisitions involve a number of special risks, including the
diversion of management's attention to assimilation of the operations and
personnel of the acquired companies in an efficient and timely manner, the
retention of key employees, the difficulty of presenting a unified corporate
image, the coordination of research and development and sales efforts and the
integration of the acquired products.
The Company has lost certain key employees of acquired companies, and, in some
cases, the assimilation of the operations of acquired companies took longer than
initially anticipated by the Company. In addition, because the employees of
acquired companies have frequently remained in their existing, geographically
diverse facilities, the Company has not realized certain economies of scale that
might otherwise have been achieved.
Symantec typically incurs significant expenses in connection with acquisitions,
which have a significant adverse impact on the Company's profitability and
financial resources. Future acquisitions may have a significant adverse impact
on the Company's future profitability and financial resources.
FOREIGN OPERATIONS. A significant portion of Symantec's revenues, manufacturing
costs and operating expenses is transacted in foreign currencies. As a result,
the Company may be materially and adversely affected by fluctuations in currency
exchange rates, as well as increases in duty rates, exchange or price controls
or other restrictions on foreign currencies. The Company's international
operations are subject to certain risks common to international operations, such
as government regulations, import restrictions, currency fluctuations,
repatriation restrictions and, in certain jurisdictions, reduced protection for
the Company's copyrights and trademarks and economic volatility.
PRICE COMPETITION. Price competition is intense in the microcomputer business
software market and is expected to continue to increase and become even more
significant in the future, resulting in reduced profit margins. Should
competitive pressures in the industry continue to increase, Symantec may be
required to reduce software prices and/or increase its spending on sales,
marketing and research and development as a percentage of net revenues,
resulting in lower profit margins. There can be no assurance these changes will
be successful.
DISTRIBUTION CHANNELS. All customers tend to make the majority of their
purchases at the end of the fiscal quarter, in part because they are able, or
believe that they are able, to negotiate lower prices and more favorable terms.
This end-of-period buying pattern means that forecasts of quarterly and annual
financial results are particularly vulnerable to the risk that they will not be
achieved, either because expected sales do not occur or because they
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
occur at lower prices or on less favorable terms to the Company. The Company's
retail distribution customers also carry the products of Symantec's competitors.
These distributors have limited capital to invest in inventory, and their
decisions to purchase the Company's products is partly a function of pricing,
terms and special promotions offered by Symantec as well as by its competitors
over which the Company has no control and which it cannot predict.
Agreements with distributors are generally nonexclusive and may be terminated by
either party without cause. Such distributors are not within the control of
Symantec, are not obligated to purchase products and may also represent
competitors' product lines. There can be no assurance that these distributors
will continue their current relationships with Symantec on the same basis, or
that they will not give higher priority to the sale of competitors' products.
Additionally, certain distributors and resellers have experienced financial
difficulties in the past. There can be no assurance that distributors that
account for significant sales of the Company will not experience financial
difficulties in the future. Any such problems could lead to reduced sales and
could adversely affect operating results of the Company. There can be no
assurance that Symantec will be able to continue to obtain adequate distribution
channels for all of its products in the future.
Due to the rapid change in software distribution technology as demonstrated by
the increase in volume of software distributed through the Internet, there can
be no assurance that Symantec will be able to develop an effective method of
distributing its software products utilizing each of the available distribution
channels or that Symantec will develop effective distribution for those channels
which are ultimately accepted by the marketplace. The presence of new channels
could adversely impact existing channels and/or product pricing, which could
have a material adverse impact on the Company's net revenues and profitability.
The Company operates with relatively little backlog; therefore, if near-term
demand for the Company's products weakens in a given quarter, there could be an
immediate, material adverse effect on net revenues and on the Company's
operating results, which would likely result in a precipitous drop in stock
price.
CHANNEL FILL. The Company's pattern of revenues and earnings may be affected by
"channel fill." Channel fill occurs following the introduction of a new product
as distributors buy significant quantities of the new product in anticipation of
sales of such product. Software upgrades typically result in an increase in net
revenues during the first three to six months following their introduction due
to purchases by existing users, usually at discounted prices, and initial
inventory purchases by Symantec's distributors.
Channel fill may also occur in anticipation of price increases or in response to
sales promotions or incentives, some of which may be designed to encourage
customers to accelerate purchases that might otherwise occur in later periods.
Channels may also become filled simply because the distributors do not sell
their inventories to retail distribution or end users as anticipated. If
sell-through does not occur at a sufficient rate, distributors will delay
purchases or cancel orders in later periods or return prior purchases in order
to reduce their inventories. Such order delays or cancellations can cause
material fluctuations in revenues from one quarter to the next.
Between the date Symantec announces a new version or new product and the date of
release, distributors, dealers and end users often delay purchases, cancel
orders or return products in anticipation of the availability of the new version
or new product. The impact is somewhat mitigated by the Company's deferral of
revenue associated with inventories estimated to be in excess of appropriate
levels in the distribution channel; however, net revenues may still be
materially affected favorably or adversely by the effects of channel fill.
Channel fill did not have a material impact on the Company's revenues in the
June and September quarters of fiscal 1998, but may have a material impact in
future periods, particularly in periods where a large number of new products are
simultaneously introduced.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
PRODUCT RETURNS. The Company estimates and maintains reserves for product
returns. Product returns can occur when the Company introduces upgrades and new
versions of products or when distributors have excess inventories. Symantec's
return policy allows its distributors, subject to certain limitations, to return
purchased products in exchange for new products or for credit towards future
purchases. End users may return products through dealers and distributors within
a reasonable period from the date of purchase for a full refund, and retailers
may return older versions of products. Symantec prepares detailed analyses of
historical return rates, and takes into consideration upcoming product upgrades,
current market conditions, customer inventory balances and any other known
factors when estimating anticipated product returns and maintains reserves for
product returns. Symantec has experienced, and may experience in the future,
significant increases in product returns above historical levels from customers
of acquired companies after an acquisition is completed. The impact of actual
returns on net revenues, net of such provisions, has not had a material effect
on the Company's liquidity as the returns typically result in the issuance of
credit towards future purchases as opposed to cash payments to the distributors.
However, there can be no assurance that future returns will not exceed the
reserves established by the Company or that future returns will not have a
material adverse effect on the operating results of the Company.
UNCERTAINTY OF RESEARCH AND DEVELOPMENT EFFORTS. Symantec believes research and
development expenditures will be necessary in order to remain competitive. While
the Company believes its research and development expenditures will result in
successful product introductions, due to the uncertainty of software development
projects, these expenditures will not necessarily result in successful product
introductions. Uncertainties impacting the success of software development
project introductions include technical difficulties, market conditions,
competitive products and customer acceptance of new products and operating
systems.
While the Company performs extensive usability and beta testing of new products,
there can be no assurance that any products currently being developed by
Symantec will be technologically successful, that any resulting products will
achieve market acceptance or that the Company's products will be effective in
competing with products either currently in the market or introduced in the
future.
The length of Symantec's product development cycle has generally been greater
than Symantec originally expected. Although such delays have undoubtedly had a
material adverse effect on Symantec's business, Symantec is not able to quantify
the magnitude of net revenues that were deferred or lost as a result of any
particular delay because Symantec is not able to predict the amount of net
revenues that would have been obtained had the original development expectations
been met. Delays in future product development are likely to occur and could
have a material adverse effect on the amount and timing of future revenues. Due
to the inherent uncertainties of software development projects, Symantec does
not generally disclose or announce the specific expected shipment date of the
Company's product introductions.
OPERATING SYSTEM. The release and subsequent customer acceptance of current or
enhanced operating systems are particularly important events that increase the
uncertainty and increase the volatility of Symantec's results.
Microsoft has incorporated advanced utilities including telecommunications,
facsimile and data recovery utilities in Windows 95 and may include additional
product features in Windows 98 or future releases of Windows NT that may
decrease the demand for certain of the Company's products, including those
currently under development.
Should the Company be unable to successfully or timely develop products that
operate under existing or new operating systems, or should the functionality of
such operating systems reduce the need for Symantec's products, the Company's
future net revenues and operating results would be immediately and significantly
adversely affected. In addition, as the timing of delivery and adoption of many
of Symantec's products is dependent on the adoption rate of these operating
systems, which the Company and securities analysts are unable to predict, the
ability of Symantec and securities analysts to forecast the Company's net
revenues has been and will continue to be adversely impacted. As a result, there
is a heightened risk that net revenues and profits will not be in line with
analysts' expectations in the periods following the introduction of existing or
new operating systems.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
INTELLECTUAL PROPERTY RIGHTS. Symantec regards its software as proprietary and
relies on a combination of copyright, patent and trademark laws and license
agreements in an attempt to protect its rights. Despite these precautions, it
may be possible for unauthorized third parties to copy aspects of Symantec's
products or to obtain and use information that Symantec regards as proprietary.
All of Symantec's products are protected by copyright, and Symantec has several
patents and patent applications pending. However, existing patent and copyright
laws afford limited practical protection. In addition, the laws of some foreign
countries do not protect Symantec's proprietary rights in its products to the
same extent as do the laws of the United States. Symantec's products are not
copy protected.
As the number of software products in the industry increases and the
functionality of these products further overlap, Symantec believes that software
developers will become increasingly subject to infringement claims. This risk is
potentially greater for companies, such as Symantec, that obtain certain of
their products through publishing agreements or acquisitions, since they have
less direct control over the development of those products.
In addition, an increasing number of patents are being issued that are
potentially applicable to software, and allegations of patent infringement are
becoming increasingly common in the software industry. It is impossible to
ascertain all possible patent infringement claims because new patents are being
issued continually, the subject of patent applications is confidential until a
patent is issued, and it may not be apparent even from a patent that has already
been issued whether it is potentially applicable to a particular software
product. This increases the risk that Symantec's products may be subject to
claims of patent infringement. Although such claims may ultimately prove to be
without merit, they are time consuming and expensive to defend. Symantec has
been involved in disputes claiming patent infringement in the past, is currently
involved in a number of such disputes and litigation, and may be involved in the
future in such disputes and/or litigation. If Symantec is alleged to infringe
one or more patents, it may choose to litigate the claim and/or seek an
appropriate license. If litigation were to commence and a license were not
available on reasonable terms or if another party were found to have a valid
patent claim against Symantec, it could have a material adverse effect on
Symantec's business, operating results and financial condition (See Note 4 of
Notes to Consolidated Financial Statements).
LITIGATION. Symantec is involved in a number of other judicial and
administrative proceedings incidental to its business (See Note 4 of Notes to
Consolidated Financial Statements). The Company intends to defend and/or pursue
all of these lawsuits vigorously and, although an unfavorable outcome could
occur in one or more of the cases, the final resolution of these lawsuits,
individually or in the aggregate, is not expected to have a material adverse
effect on the financial position of the Company. However, depending on the
amount and timing of an unfavorable resolution of these lawsuits, it is possible
that the Company's future results of operations or cash flows could be
materially adversely effected in a particular period.
SALES AND MARKETING AND SUPPORT INVESTMENTS. Symantec believes substantial sales
and marketing efforts are essential to achieve revenue growth and to maintain
and enhance Symantec's competitive position. There can be no assurance that
these sales and marketing efforts will be successful.
BUSINESS DISRUPTION. Much of the Company's administration, sales and marketing,
manufacturing and research and development facilities are located on the west
coast of the United States. Future earthquakes or other natural disasters could
cause a significant disruption to the Company's operations and may cause delays
in product development that could adversely impact future revenues of the
Company.
Order entry and product shipping are geographically separated both domestically
and internationally. A disruption in communications between these facilities,
particularly at the end of a fiscal quarter, would likely result in an
unexpected shortfall in net revenues and could result in an adverse impact on
operating results.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
EMPLOYEE RISK. Competition in recruiting personnel in the software industry is
intense. Symantec believes that its future success will depend in part on its
ability to recruit and retain highly skilled management, marketing and technical
personnel. Symantec believes that it must provide personnel with a competitive
compensation package, which necessitates the continued availability of stock
options which requires ongoing stockholder approval of such option programs.
RESULTS OF OPERATIONS
The following table sets forth each item from the consolidated statements of
operations as a percentage of net revenues and the percentage change in the
total amount of each item for the periods indicated.
<TABLE>
<CAPTION>
Percent Percent
Three Months Change Six Months Change
Ended in Dollar Ended in Dollar
September 30, Amounts September 30, Amounts
------------- --------- ------------- ---------
1997 1996 1997 1996
--- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Net revenues 100% 100% 27% 100% 100% 25%
Cost of revenues 16 19 8 16 19 3
--- --- --- ---
Gross margin 84 81 32 84 81 31
Operating expenses:
Research and development 17 19 13 16 20 3
Sales and marketing 44 49 16 45 49 15
General and administrative 7 7 15 7 7 20
Acquisition, restructuring and
other expenses -- 6 (100) -- 4 (100)
--- --- --- ---
Total operating expenses 68 81 6 68 80 7
--- --- --- ---
Operating income (loss) 16 -- * 16 1 2,224
Interest income 2 1 86 3 1 80
Interest expense -- -- (4) -- -- (13)
Other income (expense), net 1 -- 2,839 -- -- *
--- --- --- ---
Income before income taxes 19 1 2,627 19 2 1,067
Provision for income taxes 4 -- 6,172 5 -- 2,586
--- --- --- ---
Net income 15% 1% 2,233 14% 2% 899
=== === === ===
</TABLE>
* percentage change is not meaningful.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
NET REVENUES.
Net revenues increased 27% from $109 million in the quarter ended September 30,
1996 to $139 million in the quarter ended September 30, 1997. Net revenues
increased 25% from $218 million for the six month period ended September 30,
1996 to $274 million for the six month period ended September 30, 1997. During
the comparative three and six month periods ended September 30, 1997 and 1996,
Symantec experienced increased net revenues from its Security and Assistance and
Remote Productivity Solutions business units.
The Security and Assistance business unit is dedicated to being indispensable to
customers' daily use of computers by increasing productivity and keeping
computers safe and reliable. Increased net revenues were primarily related to
Windows 95 and Windows NT platform sales of Norton Utilities and Norton
AntiVirus for the comparable three and six month September periods. Net revenues
from the Security and Assistance business unit comprised approximately 50% of
net revenues for the September 1997 three and six month periods, compared to 45%
for the September 1996 three and six month periods.
The Remote Productivity Solutions business unit helps remote professionals
remain productive and work reliably, anywhere, anytime. The specific customer
needs focused on by this business unit include: connecting, performance and
remote security, managing multiple data sources, and accessing data, people and
applications. Increased net revenues for both the comparable three and six month
September periods primarily resulted from increased sales of pcANYWHERE for
Windows 95, WinFax Pro for Windows 95 version 8.0 and ACT! for Windows 95. Net
revenues from the Remote Productivity Solutions group comprised approximately
40% of the Company's net revenues for the September 1997 three and six month
periods, compared to 35% for the September 1996 three and six month periods.
The remaining 10% of the Company's revenue for the September 1997 three and six
month periods and 20% of net revenue for the September 1996 three and six months
periods include product revenues related to development tools for Java
applications, royalty and revenue streams from the sale of certain of Symantec's
software product lines and revenues from products nearing the end of their life
cycles. A majority of this revenue for the three and six month periods ended
September 30, 1997 is comprised of payments and royalty streams related to the
sale of certain software products and related tangible assets to JetForm
Corporation ("JetForm") and Hewlett-Packard ("Hewlett-Packard") during fiscal
1997. For a discussion of the related sale transactions, see Symantec's Annual
Report on Form 10-K for the year ended March 31, 1997, Consolidated Financial
Statements, Note 9. Sale of Product Rights.
Net revenues from international sales were approximately $41 million and $30
million and represented 30% and 27% of total net revenues in the September 1997
and 1996 quarters, respectively. Net revenues between comparable September
quarters increased by 37% in Europe, 49% in Asia Pacific, 32% in Japan and 82%
in Latin America. Net revenues from international sales were approximately $82
million and $65 million in the six month periods ended September 30, 1997 and
1996, respectively, and represented approximately 30% of total revenues in both
six month periods.
GROSS MARGIN.
Gross margin represents net revenues less cost of revenues. Cost of revenues
consists primarily of manufacturing expenses, manuals, packaging, royalties paid
to third parties under publishing contracts and amortization and write-off of
capitalized software.
Gross margins were 84% for the three and six month periods ended September 30,
1997 and 81% for the three and six month periods ended September 30, 1996.
During the past six months, the Company eliminated book-form manuals for certain
of its products by moving the information to CD ROM, resulting an increase in
gross margin during the three and six month periods ended September 30, 1997.
Additionally, the Company has experienced a decline in manufacturing overhead
costs as a percentage of revenues due to improved economies of scale for the
three and six month periods ended September 30, 1997. Total revenues received by
Symantec from JetForm and
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Hewlett-Packard during the three and six month periods ended September 30, 1997
increased from total revenues received from JetForm and for other software
development services during the three and six month periods ended September 30,
1996. These increased revenues contributed to increases in gross margin for the
comparable periods as there were minimal costs associated with these revenue
streams.
Amortization of capitalized software, including the amortization and write-off
of both purchased product rights and capitalized software development expenses,
decreased during the September 30, 1997 quarter as compared to the September 30,
1996 quarter, as a result of the write-off of a significant portion of
Symantec's capitalized software development costs during the March 1997 quarter.
RESEARCH AND DEVELOPMENT EXPENSES.
Research and development expenses totaled approximately $24 million or 17% of
net revenues in the quarter ended September 30, 1997 and approximately $21
million or 19% of net revenues in the quarter ended September 30, 1996. Research
and development expenses totaled approximately $45 million or 16 % of net
revenues for the six month period ended September 30, 1997 and approximately $44
million or 20% of net revenues in the six month period ended September 30, 1996.
Research and development expenditures are generally charged to operations as
incurred. The decrease in research and development expenses as a percentage of
net revenue was the result of the elimination of research and development
efforts related to the Networking Business Unit, which was sold to
Hewlett-Packard during the March 1997 quarter, as well as decreased product
development efforts, including headcount, associated with certain of the
Company's software products.
During the three and six month periods ended September 30, 1996, Symantec's
research and development costs were reduced by the capitalization of
approximately $2 million and $5 million of software development costs,
respectively, which primarily related to the Company's Networking Business Unit.
Subsequent to the sale of the Networking Business Unit to Hewlett-Packard during
the March 1997 quarter, Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed", did not materially affect the Company.
SALES AND MARKETING EXPENSES.
Sales and marketing expenses totaled approximately $61 million or 44% of net
revenues in the quarter ended September 30, 1997 and approximately $53 million
or 49% of net revenues in the prior year comparable quarter. Sales and marketing
expenses totaled approximately $123 million or 45% of net revenues for the six
month period ended September 30, 1997 and approximately $107 million or 49% of
net revenues in prior year comparable period. The decline in sales and marketing
expenses as a percentage of net revenue was largely due to compensation and
overhead costs which increased at a lower rate than the increase in net revenue
during the comparable three and six month periods ended September 30, 1997 and
September 30, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses increased to approximately $9 million and
$18 million in the three and six month periods ended September 30, 1997,
respectively, from approximately $8 million and $15 million in the three and six
month periods ended September 30, 1996, respectively. General and administrative
expenses were approximately 7% of net revenues for the three and six month
periods ending September 30, 1997 and 1996. While general and administrative
expenses remained constant as a percentage of revenue between the comparable
three and six month periods, the absolute dollar increase in these expenses
related to increased business activities.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
ACQUISITION, RESTRUCTURING AND OTHER EXPENSES.
Acquisition Expenses. No acquisition expenses were recorded during the three and
six month periods ended September 30, 1997. During the quarter ended September
30, 1996, Symantec recorded a $1.8 million charge in connection with the write
off of an investment in a joint venture and a $3.1 million charge in connection
with the acquisition of certain in process software development technology.
In the quarter ended June 30, 1996, Symantec recorded total acquisition charges
of $0.6 million in connection with the acquisition of Fast Track, Inc. The
charges included $0.4 million for legal, accounting and financial advisory
services and $0.2 million for the consolidation and discontinuance of certain
operational activities and other acquisition related expenses.
Other Non-Recurring Expenses. No other non-recurring expenses were recorded
during the three and six month periods ended September 30, 1997. During the
quarter ended September 30, 1996, Symantec recorded $2.5 million for costs
related to the restructuring of certain domestic and international sales and
research and development operations.
During the quarter ended June 30, 1996, Symantec recorded $0.7 million for costs
related to the centralization of certain research and development activities,
litigation settlement costs and other non-recurring expenses.
As of September 30, 1997, total remaining accrued acquisition, restructuring and
other expenses were approximately $3 million.
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME (EXPENSE).
Interest income was approximately $3 million and $2 million in the quarters
ended September 30, 1997 and 1996, respectively, and $6 million and $3 million
for the six months ended September 30, 1997 and 1996, respectively. The increase
in interest income for the three and six month periods is due to higher average
invested cash balances.
Interest expense was $0.3 million for each of the three months ended September
30, 1997 and 1996, and $0.6 million and $0.7 million for the six months ended
September 30, 1997 and 1996, respectively. Interest expense is principally
related to Symantec's convertible subordinated debentures. Other expense is
primarily comprised of foreign currency exchange gains and losses from
fluctuations in foreign currency exchange rates.
Symantec conducts business in various foreign currencies and is therefore
subject to the transaction exposures that arise from foreign exchange rate
movements between the dates that foreign currency transactions are recorded and
the dates that they are settled. Symantec utilizes some natural hedging to
mitigate Symantec's transaction exposures and hedges some residual transaction
exposures through the use of one-month forward contracts. At September 30, 1997,
there was a total of approximately $58 million of outstanding forward exchange
contracts. The net liability of forward contracts was approximately $41 million
at September 30, 1997. During the September 1997 quarter, the Company recognized
an approximately $1 million gain related to its hedging activities as a result
of exchange rate fluctuations in Europe during the period. Gains or losses would
occur on forward contracts held by Symantec when changes in foreign currency
exchange rates occur. These gains and losses should be largely offset by the
transaction gains and losses resulting from foreign currency denominated cash,
accounts receivable, trade payables, intercompany balances, and short-term
notes. There can be no assurance that these strategies will continue to be
effective or that transaction gains or losses can be minimized or forecasted
accurately. Symantec does not hedge its translation risk.
INCOME TAX PROVISION
The effective tax provision for the six months ended September 30, 1997 was 23%,
which is lower than the U.S. federal statutory tax rate due primarily to a lower
tax rate from the Company's Irish operations and to the utilization of
previously unbenefitted net operating losses and tax credits. Symantec believes
that the effective tax rate will increase in future periods. The effective tax
provision for the six months ended September 30, 1996 was 10%.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Cash, short-term investments and long-term investments increased $50 million to
approximately $210 million at September 30, 1997 from approximately $160 million
at March 31, 1997. This increase was largely due to cash provided from operating
activities and net proceeds from the exercise of stock options and the sales of
common stock under the Employee Stock Purchase Plan and Stock Option Plans.
The restricted investment balance of $52 million relates to collateral
requirements under lease agreements entered into by Symantec during the 1997
fiscal year. Symantec is obligated under lease agreements for two existing
office buildings, one parcel of land and one office building under construction
in Cupertino, California to maintain a restricted cash balance invested in U.S.
treasury notes with maturities not to exceed three years. In accordance with the
lease terms, these funds are not available to meet operating cash requirements.
Net cash provided by operating activities was approximately $64 million and was
comprised of the Company's net income of $39 million and non-cash related
expenses of $14 million and a net decrease in assets and liabilities of $11
million.
Trade accounts receivable increased $8 million from approximately $48 million at
March 31, 1997 to approximately $56 million at September 30, 1997 primarily due
to new product releases and strong sales during the last week of the September
1997 quarter.
On April 29, 1997, the Board of Directors of Symantec authorized the repurchase
of up to 1,000,000 shares of Symantec common stock by June 13, 1997. As of June
13, 1997, management completed the repurchase of 500,000 shares at prices
ranging from $16.57 to $17.00 per share.
The Company has a $10 million line of credit that expires in March 1998. The
Company was in compliance with the debt covenants at September 30, 1997. At
September 30, 1997, there were no borrowings outstanding under this line and
there were less than $0.3 million of standby letters of credit outstanding under
this agreement. Future acquisitions by the Company may cause the Company to be
in violation of the line of credit covenants; however, the Company believes that
if the line of credit were canceled or amounts were not available under the
line, there would not be a material adverse impact on the financial results,
liquidity or capital resources of the Company.
If Symantec were to sustain significant losses, the Company could be required to
reduce operating expenses, which could result in product delays, reassessment of
acquisition opportunities, which could negatively impact the Company's growth
objectives, and/or pursue further financing options. The Company believes
existing cash and short-term investments will be sufficient to fund operations
for the next year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is incorporated by reference to Note 4 of
Notes to Consolidated Financial Statements included herein on page 8 of this
Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of stockholders of Symantec was held on September 18,
1997.
(b) Matters voted on at the meeting and votes cast on each were as follows:
<TABLE>
<CAPTION>
Total Vote Authority
Total Vote Withheld Withheld
For Each From Each From All
Director Director Nominees
---------- ------- ----------
<S> <C> <C> <C>
1. To elect six directors to Symantec's
Board of Directors, each to hold office
until his successor is elected and
qualified or until his earlier
resignation or removal.
Charles M. Boesenberg ................. 47,205,966 924,068 --
Walter W. Bregman ..................... 47,204,526 925,508 --
Carl D. Carman ........................ 47,205,244 924,790 --
Gordon E. Eubanks, Jr ................. 47,167,318 962,716 --
Robert S. Miller ...................... 47,208,482 921,552 --
Robert R. B. Dykes .................... 47,203,547 926,487 --
</TABLE>
<TABLE>
<CAPTION>
Broker
For Against Abstain "Non-Votes"
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
2. To consider and act upon a proposal to 25,431,715 22,462,773 237,253 --
amend Symantec's 1996 Equity Incentive
Plan (the "96 Plan") to make available
for issuance an additional 2,648,708
shares of Symantec Common Stock, which
will raise the 96 Plan's limit on shares
that may be issued pursuant to awards
granted from 4,077,946 to 6,726,654.
3. To consider and act upon a proposal to 16,858,886 19,790,645 916,998 --
create an independent nominating
committee of the Board of Directors.
4. To consider and act upon a proposal to 47,869,475 78,971 183,296 --
ratify the Board of Director's selection
of Ernst & Young as Symantec's
independent auditors .
</TABLE>
ITEM 5. OTHER INFORMATION
The Board of Directors of Symantec Corporation appointed Tania Amochaev to fill
the vacancy on the Board of Directors at their October 23, 1997 meeting. Ms.
Amochaev is President and CEO of QuickResponse Services.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as part of, or incorporated
by reference into, this Form 10-Q:
11.01 Computation of Net Income Per Share
27.01 Financial Data Schedule
(b) Reports on Form 8-K
None
ITEMS 2 AND 3 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
22
<PAGE> 23
SIGNATURES
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.
Date: November 6, 1997 SYMANTEC CORPORATION
By /s/ Howard A. Bain III
-------------------------------------------
Howard A. Bain III
Executive Vice President/Worldwide
Operations and Chief Financial Officer
(duly authorized officer)
/s/ Ronald W. Kisling
-------------------------------------------
Ronald W. Kisling
Vice President Controller and
Chief Accounting Officer
23
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Descriptions
- -------- ------------
<S> <C>
11.01 Computation of Net Income Per Share
27.01 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.01
SYMANTEC CORPORATION
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
(In thousands, except per share data) 1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME PER SHARE
Net income ............................... $20,580 $ 882 $39,115 $ 3,917
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period . 55,938 54,729 55,698 54,346
Shares issuable from assumed exercise
of options ........................... 2,820 222 2,244 696
------- ------- ------- -------
Common and common stock equivalent
shares outstanding for purpose of
calculating primary net income
per share ............................ 58,758 54,951 57,942 55,042
======= ======= ======= =======
Primary net income per share ............. $ .35 $ .02 $ .68 $ .07
======= ======= ======= =======
FULLY DILUTED NET INCOME PER SHARE
Net income ............................... $20,580 $ 882 $39,115 $ 3,917
Interest on convertible subordinated
debentures, net of income tax effect . 177 -- 354 --
------- ------- ------- -------
Net income, as adjusted .................. $20,757 $ 882 $39,469 $ 3,917
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period . 55,938 54,729 55,698 54,346
Shares issuable from assumed exercise
of options ........................... 2,822 222 2,817 696
Shares issuable from assumed conversion
of convertible subordinated debentures 1,250 -- 1,250 --
------- ------- ------- -------
Total shares for purpose of calculating
fully diluted net income per share ... 60,010 54,951 59,765 55,042
======= ======= ======= =======
Fully diluted net income per share ....... $ .35 $ .02 $ .66 $ .07
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-03-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> OCT-03-1997
<CASH> 106,592
<SECURITIES> 70,113
<RECEIVABLES> 60,220
<ALLOWANCES> (4,327)
<INVENTORY> 2,310
<CURRENT-ASSETS> 261,050
<PP&E> 148,523
<DEPRECIATION> (96,763)
<TOTAL-ASSETS> 402,269
<CURRENT-LIABILITIES> 125,627
<BONDS> 15,107
0
0
<COMMON> 562
<OTHER-SE> 260,973
<TOTAL-LIABILITY-AND-EQUITY> 402,269
<SALES> 274,029
<TOTAL-REVENUES> 274,029
<CGS> 43,309
<TOTAL-COSTS> 43,309
<OTHER-EXPENSES> 186,164
<LOSS-PROVISION> 508
<INTEREST-EXPENSE> 579
<INCOME-PRETAX> 50,799
<INCOME-TAX> 11,684
<INCOME-CONTINUING> 39,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,115
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.66
</TABLE>
