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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 DECEMBER 27, 1996.
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)
Registrant's telephone number, including area code: (408) 253-9600
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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 3,930,768 shares of Delrina exchangeable stock, as of
January 24, 1997:
COMMON STOCK, PAR VALUE $0.01 PER SHARE 55,273,196 SHARES
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<PAGE>
SYMANTEC CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED DECEMBER 27, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1996 and March 31, 1996 . . . . . . . . . 3
Consolidated Statements of Operations
for the three and nine months ended December 31, 1996 and 1995 4
Consolidated Statements of Cash Flow
for the nine months ended December 31, 1996 and 1995 . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 22
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMANTEC CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
(In thousands) 1996 1996
- -------------- ------------ ---------
ASSETS (unaudited)
Current assets:
Cash and short-term investments $ 133,438 $ 129,199
Trade accounts receivable 74,752 72,256
Inventories 5,090 7,893
Deferred income taxes 11,140 12,875
Other 11,691 14,639
---------- ----------
Total current assets 236,111 236,862
Equipment and leasehold improvements 53,088 51,698
Restricted investments 47,262 --
Capitalized software 8,871 4,183
Other 2,502 5,186
---------- ----------
$ 347,834 $ 297,929
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,973 $ 23,368
Accrued compensation and benefits 18,031 14,888
Other accrued expenses 80,022 60,566
Income taxes payable 3,237 3,329
Current portion of long-term obligations 19 68
---------- ---------
Total current liabilities 127,282 102,219
Convertible subordinated debentures 15,000 15,000
Long-term obligations 228 393
Stockholders' equity:
Preferred stock (authorized: 1,000 shares;
issued and outstanding: none) -- --
Common stock (authorized: 100,000; issued
and outstanding: 54,889 and 53,636 shares) 549 536
Capital in excess of par value 285,584 279,508
Notes receivable from stockholders (144) (144)
Cumulative translation adjustment (5,994) (7,591)
Accumulated deficit (74,671) (91,992)
---------- ----------
Total stockholders' equity 205,324 180,317
---------- ----------
$ 347,834 $ 297,929
---------- ----------
---------- ----------
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
3
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SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- -----------------------
(In thousands, except per share data; unaudited) 1996 1995 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $124,081 $111,097 $342,477 $329,472
Cost of revenues 21,976 31,070 64,190 88,378
-------- -------- -------- --------
Gross margin 102,105 80,027 278,287 241,094
Operating expenses:
Research and development 21,002 26,334 64,843 70,202
Sales and marketing 57,495 60,159 164,241 172,818
General and administrative 8,858 6,275 23,951 27,163
Acquisition, restructuring and
other expenses -- 25,688 8,585 25,617
-------- -------- -------- --------
Total operating expenses 87,355 118,456 261,620 295,800
-------- -------- -------- --------
Operating income (loss) 14,750 (38,429) 16,667 (54,706)
Interest income 1,556 1,745 4,991 5,929
Interest expense (352) (338) (1,020) (1,121)
Other income (expense), net 343 216 11 (2,437)
-------- -------- -------- --------
Income (loss) before income taxes 16,297 (36,806) 20,649 (52,335)
Provision (benefit) for income taxes 2,445 -- 2,880 (4,609)
-------- -------- -------- --------
Net income (loss) $ 13,852 (36,806) $ 17,769 $(47,726)
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share $ 0.25 $ (0.69) $ 0.32 $ (0.91)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used to compute net income
(loss) per share 55,409 53,107 55,164 52,391
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
4
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SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
Nine Months Ended
December 31,
(In thousands; unaudited) 1996 1995
- ------------------------- --------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 17,769 $ (47,726)
Delrina net loss for the quarter ended June 30, 1995 -- 4,834
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization of equipment and
leasehold improvements 18,331 19,856
Amortization and write-off of capitalized software costs 3,277 16,516
Write-off of equipment and leasehold improvements 3,083 --
Deferred income taxes 1,730 (1,487)
Net change in assets and liabilities:
Trade accounts receivable (1,206) 2,306
Inventories 2,911 993
Other current assets 2,943 (3,840)
Capitalized software costs (7,660) (1,299)
Other assets 2,650 2,068
Accounts payable 2,322 (429)
Accrued compensation and benefits 3,147 (854)
Accrued other expenses 18,754 9,140
Income taxes payable (182) (188)
--------- ---------
Net cash provided by operating activities 67,869 (110)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (22,742) (28,273)
Purchased product rights (310) (744)
Purchases of short-term, available-for-sale investments (140,000) (104,500)
Maturities of short-term, available-for-sale investments 150,497 118,411
Purchases of restricted investments (47,262) --
--------- ---------
Net cash used in investing activities (59,817) (15,106)
--------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term obligations (214) (119)
Net proceeds from sales of common stock and other 5,644 19,573
--------- ---------
Net cash provided by financing activities 5,430 19,454
Effect of exchange rate fluctuations on cash and
cash equivalents 1,253 87
--------- ---------
Increase in cash and cash equivalents 14,735 4,325
Beginning cash and cash equivalents 41,777 30,192
--------- ---------
Ending cash and cash equivalents $ 56,512 $ 34,517
--------- ---------
--------- ---------
</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 December 31, 1996 and for the three and nine months ended
December 31, 1996 and 1995 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, 1996. The results of operations for the three and nine months ended
December 31, 1996 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 December 31, 1996, March 31, 1996 and
December 31, 1995 reflect amounts as of and for the periods ended December 27,
1996, March 29, 1996 and December 29, 1995, respectively.
Research and development expenditures are charged to operations as incurred.
During the December 1996 quarter, the Company capitalized approximately $2.4
million of costs principally associated with the development of certain
networking software products in accordance with Statement of Financial
Accounting Standard No. 86. To the extent the Company capitalizes its product
development costs, the effect is to defer such costs to future periods and match
those costs to the revenue generated by the developed products. Amounts
capitalized may fluctuate depending in part on the number and status of internal
software development projects.
6
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 2. BALANCE SHEET INFORMATION
December 31, March 31,
(In thousands) 1996 1996
- -------------- ------------ ----------
(unaudited)
Cash and short-term investments:
Cash $ 32,741 $ 20,176
Cash equivalents 23,771 21,601
Short-term investments 76,926 87,422
--------- ---------
$ 133,438 $ 129,199
--------- ---------
--------- ---------
Trade accounts receivable:
Receivables $ 78,923 $ 77,272
Less: allowance for doubtful accounts (4,171) (5,016)
--------- ---------
$ 74,752 $ 72,256
--------- ---------
--------- ---------
Inventories:
Raw materials $ 1,941 $ 1,969
Finished goods 3,149 5,924
--------- ---------
$ 5,090 $ 7,893
--------- ---------
--------- ---------
Equipment and leasehold improvements:
Computer equipment $ 91,428 $ 79,153
Office furniture and equipment 27,412 25,753
Leasehold improvements 17,077 12,603
--------- ---------
135,917 117,509
Less: accumulated depreciation and
amortization (82,829) (65,811)
--------- ---------
$ 53,088 $ 51,698
--------- ---------
--------- ---------
Capitalized software:
Purchased product rights $ 7,607 $ 8,680
Capitalized software costs 12,941 5,623
Less: accumulated amortization of
purchased product rights (7,435) (8,162)
Less: accumulated amortization of
capitalized software costs (4,242) (1,958)
--------- ---------
$ 8,871 $ 4,183
--------- ---------
--------- ---------
Other accrued expenses:
Acquisition, restructuring and other expenses $ 4,110 $ 7,833
Deferred revenue 38,285 26,266
Marketing development funds 14,734 11,412
Other 22,893 15,055
--------- ---------
$ 80,022 $ 60,566
--------- ---------
--------- ---------
NOTE 3. LINE OF CREDIT
The Company has a $10.0 million bank line of credit that expires in March 1998.
There were no borrowings outstanding at December 31, 1996. The Company was in
compliance with the line of credit covenants as of December 31, 1996. At
December 31, 1996, there was approximately $0.4 million of standby letters of
credit outstanding under this line of credit.
7
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 4. ACQUISITION, RESTRUCTURING AND OTHER EXPENSES
Acquisition, restructuring and other expenses consisted of the following:
<TABLE>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ---------------------
(In thousands) 1996 1995 1996 1995
- ----------------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
Write off of investment in joint venture $ -- $ -- $ 1,750 $ --
Write off of acquired in-process research
and development costs -- -- 3,050 --
Centralization and restructuring
and other costs -- -- 3,185 --
Fast Track, Inc. acquisition expenses -- -- 600 --
Delrina Corporation acquisition expenses -- 22,000 -- 22,000
Loss on sale of subsidiary and other costs -- 3,688 -- 3,688
Consolidation expenses for certain research
and development activities -- -- -- 2,229
Central Point acquisition expenses -- -- -- (2,300)
------- ------- ------- --------
Total acquisition, restructuring and
other expenses $ -- $25,688 $ 8,585 $ 25,617
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
During November 1995, Symantec completed its acquisition of Delrina Corporation
("Delrina"), recording total acquisition charges of $22.0 million. During the
December 1995 quarter, Symantec incurred a $3.7 million charge related to the
sale of certain assets and liabilities of a subsidiary of the Company and other
expenses.
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 for the write off of certain in-process research and
development costs acquired by the Company. Additionally, during the nine months
ended December 31, 1996, the Company recorded a charge of $3.2 million for costs
related to the restructuring of certain domestic and international sales and
research and development operations, settlement of the Carmel lawsuit (see Note
6) and other expenses. The restructuring plans should be substantially
completed during fiscal 1997. 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.
During the quarter ended June 30, 1995, the Company incurred $2.2 million to
consolidate certain research and development activities. This consolidation has
been completed. In the quarter ended June 30, 1995, the Company recognized a
reduction in accrued acquisition and restructuring expenses related to the
acquisition of Central Point Software, Inc. ("Central Point") of $2.3 million,
as actual restructuring costs incurred were less than costs previously accrued
by Central Point.
As of December 31, 1996, total remaining accrued acquisition, restructuring and
other expenses were $4.1 million and included $0.6 million for legal, accounting
and financial advisory services, $2.6 million for the elimination of duplicative
and excess facilities, and $0.9 million for the consolidation and discontinuance
of certain operational activities and other acquisition related expenses.
NOTE 5. INCOME TAXES
Income taxes are computed in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Symantec provides for income
taxes during interim reporting periods based upon an estimate of its annual
effective tax rate. This estimate reflects U.S. federal, state and foreign
income taxes.
8
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 6. 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. The same plaintiffs have further
filed, on January 7, 1997, a complaint in federal court based on the same facts
as the state court complaint, for violation of the Securities 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. The Company has accrued certain estimated legal fees and expenses
related to this matter; however, actual amounts may differ materially from those
estimated amounts.
On September 3, 1992, Borland International, Inc. ("Borland") filed a lawsuit in
the Superior Court for Santa Cruz County, California against Symantec, Gordon E.
Eubanks, Jr. (Symantec's President and Chief Executive Officer) and Eugene Wang
(a former Executive Vice President of Symantec who is a former employee of
Borland). The complaint, as amended, alleges misappropriation of trade secrets,
unfair competition, including breach of contract, interference with prospective
economic advantage and unjust enrichment. Borland alleged that prior to joining
Symantec, Mr. Wang transmitted to Mr. Eubanks confidential information
concerning Borland's product and marketing plans. Borland claims damages in an
unspecified amount. Symantec has denied the allegations of Borland's complaint
and contends that Borland has suffered no damages from the alleged actions.
Borland obtained a temporary restraining order and a preliminary injunction
prohibiting the defendants from using, disseminating or destroying any Borland
proprietary information or trade secrets. Symantec filed a cross complaint
against Borland alleging that Borland had committed abuse of process and
defamation in publishing statements that Symantec had acted in contempt of a
temporary restraining order. The case is not being actively prosecuted at this
time due to the outcome of the criminal proceedings, discussed below. Symantec
believes that Borland's claims have no merit.
On September 2, 1992, the Scotts Valley, California police department, operating
with search warrants for Borland proprietary and trade secret information,
searched Symantec's offices and the homes of Messrs. Eubanks and Wang and
removed documents and other materials. On February 26, 1993, criminal
indictments were filed against Messrs. Eubanks and Wang for allegedly violating
various California Penal Code Sections relating to the misappropriation of trade
secrets and unauthorized access to a computer system. On November 19, 1996, the
criminal indictments were dismissed at the request of the District Attorney.
On June 11, 1992, Dynamic Microprocessor Associates, Inc. ("DMA"), a former
wholly-owned subsidiary of Symantec which has since been merged into Symantec,
commenced an action against EKD Computer Sales & Supplies Corporation ("EKD"), a
former licensee of DMA and Thomas Green, a principal of EKD, for copyright
infringement, violations of the Lanham Act, trademark infringement,
misappropriation, deceptive acts and practices, unfair competition and breach of
contract. On July 14, 1992, the Suffolk County, New York sheriff's department
conducted a search of EKD's premises and seized and impounded thousands of
infringing articles. On July 21, 1992, the Court issued a preliminary
injunction against EKD and Mr. Green, enjoining them from manufacturing,
marketing, distributing, copying or purporting to license DMA's pcANYWHERE III
or using DMA's marks.
On July 20, 1992 and in a subsequent amendment, EKD and Mr. Green answered
Symantec's complaint denying all liability and asserting counterclaims against
Symantec and Lee Rautenberg, a former principal of DMA. In May 1993, EKD and
Mr. Green were granted permission to file a Second Amended Answer and
Counterclaims that dropped every previously raised claim and instead alleged
that DMA obtained the temporary restraining order and preliminary injunction in
bad faith and that DMA, Symantec and Mr. Rautenberg breached certain license
agreements and violated certain federal and New York State antitrust laws. In
February 1995, DMA was granted leave to file an Amended Complaint, which EKD
subsequently responded to by a Third Amended Answer and
9
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Counterclaims virtually identical to EKD's Second Amended pleading. Symantec
believes the charges made by EKD and Mr. Green have no merit.
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.
Symantec is currently evaluating claims of patent infringement asserted by 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.
NOTE 7. LEASE AGREEMENTS
In October 1996, Symantec entered into lease agreements for two office buildings
in Cupertino, California. The lease agreements are for seven years and the
lease payments total approximately $2.6 million per year. Lease payments are
based on the three month London Interbank Offering Rate ("LIBOR") in effect at
the beginning of each fiscal quarter. Symantec has the right to acquire the
related properties at any time during the seven year lease period or may renew
the lease. The guaranteed residual payment on the lease agreements totals
approximately $38.4 million. Symantec is required to maintain a corresponding
investment in U.S. treasury notes with maturities not to exceed three years.
Symantec is restricted in use of these investments per the terms of the lease
agreement. The investments total $39.3 million and are classified as non-
current restricted investments within the financial statements.
The Company currently occupies a portion of these office buildings and has
assumed the right to sub-lease income provided by the other tenants, which is
estimated to be approximately $2.1 million per fiscal year based on current
occupancy and rental rates. The sub-lease agreements have terms expiring in
January 1997 through September 2000.
NOTE 8. SUBSEQUENT EVENT
In January 1997, Symantec entered into a lease agreement for land to support
future expansion in Cupertino, California. The lease agreement is for seven
years and the lease payments total approximately $0.4 million per year. Lease
payments are based on the three month LIBOR in effect at the beginning of each
fiscal quarter. Symantec has the right to acquire the related property at any
time during the seven year lease period or may renew the lease. The guaranteed
residual payment on the lease agreement is approximately $7.0 million. Symantec
is required to maintain a corresponding investment in U.S. treasury notes with
maturities not to exceed three years of $7.1 million. The investments currently
are classified as long-term restricted investments within the financial
statements.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements that are subject
to significant risks and uncertainties. The forward-looking statements within
this Form 10-Q are identified by words such as "believes," "anticipates,"
"expects," "intends," "may" and other similar expressions. However, these
words are not the exclusive means of identifying such statements. 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
There are several important factors that could cause actual results to differ
materially from historical results and percentages and results anticipated by
the forward-looking statements contained in the following discussion. Such
factors and risks include, but are not limited to, competition in the market
for application and network computer software, including price and product
feature competition; the introduction of new or upgraded products by existing
or new competitors; the economic environment, including corporate spending
patterns; dependence on distributors and the emergence of new channels or
changes to the current distribution channels, including the Internet;
consumer acceptance of new operating systems and the successful development
of the Company's products for these operating systems; the timing and
consumer acceptance of the Company's new or upgraded products; the ability to
successfully develop, market, support and acquire new products in an
environment of rapidly changing technology and operating systems and the cost
of such activities; acquisition risks, including increased costs and
uncertain benefits and the ability to effectively integrate operations of
acquired companies and manage growth; seasonality in the retail software
markets; and risks associated with international operations, including
foreign currency conversion, taxes and other legal restrictions.
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, which has had an immediate and
significantly adverse effect on the trading price of the Company's common
stock. This may occur again in the future.
Furthermore, the Company participates in a highly dynamic industry, which
often results in significant volatility of the Company's common stock price.
The impact of the market's acceptance and adoption rate of new operating
systems on Symantec's business, and investors' assessment thereof, will
likely continue to result in significant volatility of Symantec's results and
stock price. Also, the Internet has allowed the emergence of new competitors
who have extended their product offerings from Internet based distribution to
the retail distribution channel.
While Symantec's diverse product line has tended to lessen fluctuations in
quarterly net revenues, these fluctuations have occurred recently and are
likely to occur in the future. These fluctuations may be caused by a number
of factors, including the timing of announcements and releases of new or
enhanced versions of its products and product upgrades, the introduction of
competitive products by existing or new competitors, reduced demand for any
given product, seasonality in the retail software market, the market's
transition between operating systems and the transition from a desktop PC
environment to an enterprise-wide environment. These factors may cause
significant fluctuations in net revenues and, accordingly, operating results.
The Company has, in the past, and is continuing to devote substantial efforts
to the development of software products that operate on Microsoft's Windows
and/or Windows NT operating systems. Microsoft has incorporated advanced
utilities including telecommunications, facsimile and data recovery utilities
in its most recent release, Windows 95, and may include additional product
features in future releases of its operating systems that may
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
decrease the demand for certain of the Company's products. Should the
Company be unable to successfully or timely develop products that operate
under these operating systems, 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 new or
upgraded operating systems.
The release of product upgrades typically results in an increase in net
revenues in 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. In addition, between the
date Symantec announces a new version or new product and the ultimate release
date, distributors, dealers and end users often delay purchases, cancel
orders or return existing versions of the Company's products in anticipation
of the availability of the new version or new product.
The Company's pattern of revenues and earnings may also be affected by a
phenomenon known as "channel fill." Channel fill occurs following the
introduction of a new product or a new version of a product as distributors
buy significant quantities of the new product or new version in anticipation
of sales of such product or version. Following such purchases, the rate of
distributors' purchases often declines in a material amount, depending on the
rates of purchases by end users or "sell-through." The phenomenon of channel
fill also may occur in response to sales promotions or incentives or the
discontinuance of sales promotions or incentives, some of which may be
designed to encourage customers to accelerate purchases that might otherwise
occur in later periods. Channels also may become filled simply because the
distributors are unable to, or do not, sell their inventories to retail
distribution or end users as originally anticipated. If sell-through does
not occur at a sufficient rate, distributors will delay purchases, 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. The impact is
somewhat mitigated by the Company's deferral of revenue associated with
inventories estimated to be in excess of levels deemed appropriate 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 three and nine months
ended December 31, 1996 and 1995 but may have a material impact in future
periods, especially in periods where a large number of new products are
introduced.
The Company estimates and maintains reserves for product returns. 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 the Company's products.
Various distributors and resellers may have different return policies that
may negatively impact the level of products which are returned to Symantec.
Product returns occur when the Company introduces upgrades and new versions
of products or when distributors order excessive product. In addition,
competitive factors often require the Company to offer rights of return for
products that distributors or retail stores are unable to sell. 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. Symantec prepares detailed analyses of
historical return rates when estimating anticipated returns and maintains
reserves for product returns. In addition to detailed historical return
rates, the Company's estimation of return reserves takes into consideration
upcoming product upgrades, current market conditions, customer inventory
balances and any other known factors that could impact anticipated returns.
Based upon returns experienced, the Company's estimates have been materially
accurate. 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
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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.
Desktop software products are generally sold through the distribution channel
or directly to end-users. The Company's distribution customers also carry
the products of Symantec's competitors, some of which have significant
financial resources. The 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 those offered by its competitors over which the Company has no control and
which it cannot predict.
Symantec believes that many of its customers are moving toward an
enterprise-wide computing environment where more desktop personal computers
will be interconnected into large local-area and wide-area networks
administered by corporate MIS departments as well as through the public
Internet and corporate intranets. Symantec believes that it must continue to
develop relationships with systems integrators and other third-party vendors
that provide customer specific consulting and integration services and
deliver products developed for this market segment. While the Company
expects the market's shift toward enterprise, Internet/intranet products to
continue, there can be no assurance that the Company's enterprise products
will be successful or will gain customer acceptance. A very high proportion
of enterprise product sales may be completed in the last few days of each
quarter, in part because customers are able, or believe that they are able,
to negotiate lower prices and more favorable terms. This uncertainty related
to customer product acceptance and the 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 occur at lower prices or on less
favorable terms to the Company. The trend towards server-based applications,
the Internet and intranet environments could have a material adverse effect
on sales of the Company's desktop-based products.
Enterprise products are frequently sold through site licenses where a license
for multiple workstations is sold to a customer at a negotiated price.
Enterprise product revenues are typically comprised of lower volume, high
dollar site license transactions compared to desktop product revenues which
are typically comprised of higher volume, low dollar pre-packaged product
transactions. The prices of site licenses tend to vary based upon the
individual products purchased, the number of units licensed and the number of
workstations at the customer's site.
Price competition is significant in the microcomputer business software
market and may 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. This could have a material adverse effect on the Company's results
of operations. In addition, aggressive pricing strategies of competitors in
other software markets, some of whom have significant financial resources,
may cause the Company to further reduce software prices and/or increase sales
and marketing expenses on a number of the Company's products. Symantec has
recently reduced pricing on several of the Company's key products. These
decreases were more than offset by an increase in total number of units sold.
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 product development, including products
being developed for currently available operating systems and operating
systems under development are likely to occur in the future 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. In addition, there can be no assurance that
any products currently being developed by Symantec will be technologically
successful, that any resulting products will achieve market
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
acceptance or that the Company's products will be effective in competing with
products either currently in the market or introduced in the future.
During fiscal 1993, Symantec believes net revenues were adversely affected by
an unexpected substantial price reduction in 486-based personal computers
that caused a shift in customer spending from software to personal computer
hardware. Symantec also believes that the shift was caused by the
introduction of the Windows 3.1 operating system, which required more
computing capability. The next class of personal computers, including those
based on Intel's aggressively marketed P6/Pentium Pro microprocessor or
Motorola, Inc.'s Power-PC, have started to reduce in price, and there may be
another shift in customer buying away from software and Symantec's products,
which could result in significantly reduced revenues and a material adverse
effect on operating results. In addition, Windows 95 and Windows NT require
significantly more computer memory and hard disk space than Windows 3.1, and
if there is a shift from software to hardware spending, there could be an
adverse effect on the sales of computer hardware and software. Either of
these events could result in significantly reduced net revenues and have a
material adverse effect on Symantec's operating results and on the Company's
common stock price.
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.
While Symantec believes its research and development expenditures will result
in successful product introductions, including products being developed for
currently available operating systems and operating systems under
development, the uncertain outcome of software development projects means
that increased research and development efforts will not necessarily result
in successful product introductions due to technical difficulties, market
conditions, competitive products and other factors, such as customer
acceptance of products and new operating systems.
Symantec maintains a research and development facility in Santa Monica,
California that was damaged during the January 1994 earthquake in Southern
California. 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.
Symantec's domestic order entry department is located in Oregon, with
shipments being made from a warehouse in California. Order entry and
shipping is similarly separated in Europe. 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.
Symantec has completed a number of acquisitions and expects to acquire other
companies in the future. While the Company believes that previous
acquisitions were in the best interests of the Company and its stockholders,
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 sales and research and development efforts and the successful
integration of the acquired products.
The Company has lost certain employees of acquired companies whom it desired
to retain, and in some cases, the assimilation of the operations of acquired
companies took longer than initially had been anticipated by the Company. In
addition, because the employees of acquired companies have frequently
remained in their existing, geographically diverse locations and facilities,
the Company has not realized certain economies of scale or cost reductions
that might otherwise have been achieved.
Symantec typically incurs significant acquisition expenses for legal,
accounting and financial advisory services, the write-off of duplicative
technology, the consolidation and discontinuance of certain operational
activities and other
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
expenses related to the combination of the companies. These expenses may
have a significant adverse impact on the Company's future profitability and
financial resources.
The Company operates in a complex legal environment where, for example, an
increasing number of patents are being issued that are potentially applicable
to software. Additionally, allegations of patent infringement are becoming
increasingly common in the software industry. Symantec is currently
evaluating claims of patent infringement asserted by 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.
Additional information on these and other risk factors which could adversely
affect the Company's financial results is included in the Annual Report on
Form 10-K and the quarterly reports on Form 10-Q as filed by the Company with
the Securities and Exchange Commission on June 26, 1996, August 9, 1996 and
November 12, 1996, respectively.
OVERVIEW
Symantec develops, markets and supports a diversified line of application and
network software products designed to enhance individual and workgroup
productivity. Founded in 1982, the Company has offices in the United States,
Canada, Japan, Australia, Europe, the Pacific Rim and Latin America.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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>
Three Months Percent Nine Months Percent
Ended Change Ended Change
December 31, in Dollar December 31, in Dollar
------------------ Amounts ------------------ Amounts
1996 1995 ------- 1996 1995 --------
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net revenues.......................... 100% 100% 12% 100% 100% 4%
Cost of revenues...................... 18 28 (29) 19 27 (27)
---- ---- ---- ----
Gross margin...................... 82 72 28 81 73 15
Operating expenses:
Research and development.......... 17 24 (20) 19 21 (8)
Sales and marketing............... 46 54 (4) 48 53 (5)
General and administrative........ 7 6 41 7 8 (12)
Acquisition, restructuring and
other expenses.................. -- 23 * 2 8 (67)
---- ---- ---- ----
Total operating expenses........ 70 107 (26) 76 90 (12)
---- ---- ---- ----
Operating income (loss)............... 12 (35) * 5 (17) *
Interest income....................... 1 2 (11) 1 2 (16)
Interest expense...................... -- -- 4 -- -- (9)
Other income (expense), net........... -- -- 59 -- (1) *
---- ---- ---- ----
Income (loss) before income taxes..... 13 (33) * 6 (16) *
Provision (benefit) for income taxes.. 2 -- * 1 (2) *
---- ---- ---- ----
Net income (loss)..................... 11% (33)% * 5% (14)% *
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
* percentage change is not meaningful.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
NET REVENUES.
- -------------
Net revenues were $124.1 million and $111.1 million in the quarters ended
December 31, 1996 and 1995, respectively. Strong sales of anti-virus,
Internet tools, contact management and utilities products during the December
1996 quarter more than offset the declining sales on products which Symantec
no longer actively develops or markets. Subsequent to December 1995, the
price of Norton AntiVirus was reduced; however, the increase in unit sales
more than offset the decrease in pricing, resulting in a year-to-year
increase in net revenues. Included in the December 1996 quarter is $1.9
million in consulting fees related to a contract which was substantially
completed as of the end of the December 1996 quarter. As a result of the sale
of its electronic forms software products and related tangible assets to
JetForm Corporation ("JetForm") in the September 1996 quarter, Symantec
recognized royalty revenue of $5.5 million during the December 1996 quarter.
Net revenues were $342.5 million and $329.5 million in the nine months ended
December 31, 1996 and 1995, respectively. The $13.0 million increase in net
revenues is primarily the result of strong anti-virus, network communications
and Internet tools product sales, which more than offset the declining sales
for products no longer actively developed or marketed by Symantec and the one
time recognition of approximately $7.2 million of previously deferred Central
Point Software, Inc. ("Central Point") revenue in 1995. Consulting net
revenues increased by $6.1 million during the nine month period ended
December 31,1996, as compared to the same period last year, as a result of a
consulting contract which was substantially completed as of the end of the
December 1996 quarter. During the nine month period ended December 31, 1996,
the Company recognized royalty revenue totaling $12.7 million of the total
$100.0 million JetForm sale price, the remainder of which JetForm is
contractually obligated to remit to Symantec in quarterly payments concluding
in June 2000. Due to the uncertainty regarding the collectibility of these
amounts, Symantec is recognizing the payment amounts as received from JetForm.
Net revenues from international sales were $37.9 million and $38.4 million
and represented 31% and 35% of total net revenues in the quarters ended
December 31, 1996 and 1995, respectively. Net revenues from international
sales were $102.5 million and $114.8 million and represented 30% and 35% of
total net revenues for the nine months ended December 31, 1996 and 1995,
respectively. The decrease in international net revenue as a percentage of
total net revenue is partially the result of domestic revenue growth during a
period of international revenue decline. Additionally, international
revenues for the nine months ended December 31, 1995 included the one time
recognition of approximately $7.2 million, or 6% of total net revenues,
previously deferred by Central Point prior to its acquisition by Symantec.
For the comparable nine month periods, declining revenue was also recorded in
the United Kingdom and Germany, primarily as the result of declining Windows
95 based product sales. Sales in Japan increased during the current fiscal
year.
During the December 1996 quarter, Symantec released various new products and
upgrades including ACT! For Windows 95 and NT, pcHandyman, HealthyPC,
CrashGuard, WinFax PRO 7.5, Visual Cafe, Visual Page, Norton Speed Disk
Preview for Windows NT 4.0 and Norton AntiVirus for Internet Email Gateways.
The Company's product return reserve balances typically fluctuate from period
to period based upon the level and timing of product upgrade releases.
Product return reserve balances at December 31, 1996 were substantially lower
than reserve balances at December 31, 1995. The decrease in the product
return reserve balance is primarily related to the introduction of Symantec's
Windows 95 products during the September and December 1995 quarters, which
had high sell-in volumes and, as a result, higher return provisions were
estimated. The level of actual product returns and related product return
reserves is largely a factor of the level of product sell-in (gross revenue)
from normal sales activity and the replacement of obsolete quantities with
current versions of the Company's product. As a result, gross revenues
generally move in the same direction as product returns. Changes in the
levels of product returns and related product return reserves are generally
offset by changing levels of gross revenue and, therefore, do not typically
have a material impact on reported net revenues.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Symantec provides a wide variety of free and fee-based technical support
services to its customers. Symantec provides its customers with free support
via electronic and automated services as well as 90 days complimentary free
telephone support for certain of the Company's products. In addition,
Symantec offers both individual users and corporate customers a variety of
fee-based support options for certain of the Company's products, designed to
meet their individual technical support requirements. Fee-based technical
support services did not generate significant net revenues in the three and
nine months ended December 31, 1996 and 1995 and are not expected to generate
material net revenues in the near future.
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. Amortization of capitalized software,
including amortization and the write-off of both purchased product rights and
capitalized software development expenses, totaled $0.6 million and $9.3
million for the quarters ended December 31, 1996 and 1995, respectively, and
$3.3 million and $16.5 million for the nine months ended December 31, 1996
and 1995, respectively. The significant decrease in amortization and
write-off of purchased product rights and capitalized software development
expenses for the three and nine months ended December 31, 1996 from the 1995
periods is due to Symantec's decision during the September and December 1995
quarters to discontinue development and marketing efforts related to certain
products and Delrina's write-off of capitalized software development costs
for software designed to operate on the Windows 3.1 operating system.
Gross margins were 82% and 72% for the quarters ended December 31, 1996 and
1995, respectively. The increase in the gross margin percentage is primarily
due to the significant write-off of purchased product rights and capitalized
software during the December 1995 quarter, as discussed above. In addition,
a $5.5 million royalty payment associated with the JetForm transaction was
recorded in net revenues during the December 1996 quarter. Royalty costs
decreased by $1.2 million for the December 1996 quarter, as compared to the
December 1995 quarter, due to a reduction in sales of products with royalty
obligations.
Symantec believes that the gross margin percentage should remain at
approximately 80% to 83% for the remainder of fiscal 1997 unless there is a
significant change in Symantec's net revenues or product mix.
RESEARCH AND DEVELOPMENT EXPENSES.
- ----------------------------------
Research and development expenses decreased 20% to $21.0 million or 17% of
net revenues in the quarter ended December 31, 1996 from $26.3 million or 24%
of net revenues in the quarter ended December 31, 1995. Research and
development expenses decreased to 19% of net revenues in the nine months
ended December 31, 1996 from 21% for the nine months ended December 31, 1995.
Research and development expenditures are generally charged to operations as
incurred. The decrease in research and development expense is principally
due to decreased product development efforts associated with the Company's
development of certain software products and an increase in capitalized
software development costs.
During the three and nine month periods ended December 31, 1996, the Company
capitalized approximately $2.4 million and $7.7 million, respectively, of
costs principally associated with the development of certain networking
software products in accordance with Statement of Financial Accounting
Standard No. 86. To the extent the Company capitalizes its product
development costs, the effect is to defer such costs to future periods and
match them to the revenue generated by the developed products. Amounts
capitalized may fluctuate depending in part on the number and status of
internally developed software projects. Capitalized software development
costs were not material as of December 31, 1995.
SALES AND MARKETING EXPENSES.
- -----------------------------
Sales and marketing expenses decreased 4% to $57.5 million or 46% of net
revenues in the quarter ended December 31, 1996 from $60.2 million or 54% of
net revenues in the prior year's comparable quarter. The decrease
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
in sales and marketing expenses was principally related to the elimination of
duplicative sales and marketing expenses as a result of the acquisition of
Delrina by Symantec and to the elimination of sales and marketing expenses
related to the electronic forms software products which were sold to JetForm
in September 1996. Reductions in expenditures for products no longer actively
marketed by Symantec were offset by increased spending for new products
released during the December 1996 quarter. These factors also contributed to
the $8.6 million decrease in sales and marketing expenses to $164.2 million
from $172.8 for the nine months ended December 31, 1996 and 1995,
respectively.
Symantec believes substantial sales and marketing efforts are essential to
achieve revenue growth and to maintain and enhance Symantec's competitive
position. Accordingly, with the introduction of new and upgraded products,
Symantec expects the expenses associated with these efforts to continue to
constitute its most significant operating expense. There can be no assurance
that these increased sales and marketing efforts will be successful.
GENERAL AND ADMINISTRATIVE EXPENSES.
- ------------------------------------
General and administrative expenses increased from $6.3 million or 6% of net
revenues in the quarter ended December 31, 1995 to $8.9 million or 7% of net
revenues in the quarter ended December 31, 1996. The increase was primarily
the result of management consulting expenditures. The decrease in general
and administrative expenses from $27.2 million or 8% of net revenues for the
nine months ended December 31, 1995 to $24.0 million or 7% of net revenues
for the nine months ended December 31, 1996 is primarily due to the
elimination of duplicative general and administrative expenses as a result of
the acquisition of Delrina by Symantec.
ACQUISITION, RESTRUCTURING AND OTHER EXPENSES.
- ----------------------------------------------
Acquisition Expenses.
- ---------------------
During the quarter ended December 31, 1995, Symantec completed its
acquisition of Delrina Corporation ("Delrina") and recorded total acquisition
charges of $22.0 million. In addition, during the December 1995 quarter,
Symantec incurred a $3.7 million charge related to the sale of certain assets
and liabilities of a subsidiary of the Company and other expenses.
During the September 1996 quarter, Symantec wrote off $1.8 million related to
an investment in a joint venture and $3.1 million in connection with the
acquisition of certain in-process software development.
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.
In the quarter ended June 30, 1995, the Company recognized a reduction in
accrued acquisition and restructuring expenses related to Central Point
Software, Inc. ("Central Point") of $2.3 million as actual costs incurred
were less than costs previously accrued by the companies.
RESTRUCTURING AND OTHER NON-RECURRING EXPENSES.
- -----------------------------------------------
During the September 1996 quarter, Symantec recorded $2.5 million for costs
related to the restructuring of certain domestic and international sales and
research and development operations. $0.7 million was recorded in the June
1996 quarter related to the centralization of certain research and
development activities, litigation settlement costs and other non-recurring
expenses. These restructuring plans should be substantially completed during
fiscal 1997.
In February 1995, Symantec announced a plan to consolidate certain research
and development activities. This plan was designed to gain greater synergy
between the Company's Third Generation Language and Fourth Generation
Language development groups. During the quarter ended June 30, 1995, the
Company incurred $2.2 million for the consolidation of equipment and
personnel. This consolidation has subsequently been completed.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME (EXPENSE).
- -------------------------------------------------------------
Interest income was $1.6 million and $1.7 million in the quarters ended
December 31, 1996 and 1995, respectively, and $5.0 million and $5.9 million
for the nine months ended December 31, 1996 and 1995, respectively. The
decrease in interest income for the three and nine month periods is due to
lower average interest rates on invested cash balances.
Interest expense was $0.4 million and $0.3 million for the three months ended
December 31, 1996 and 1995, respectively, and $1.0 million and $1.1 million
for the nine months ended December 31, 1996 and 1995, respectively. Other
income (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
December 31, 1996, there was a total of approximately $125.1 million of
outstanding forward exchange contracts. The net liability of forward
contracts was approximately $97.3 million at December 31, 1996. There have
been no significant gains or losses to date with respect to these activities.
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 nine months ended December 31, 1996 was
14%, which is lower than the U.S. federal statutory tax rate due to the
utilization of previously unbenefitted pre-acquisition losses from Delrina.
Symantec believes that the effective tax rate may increase in future fiscal
years. The effective tax benefit for the nine months ended December 31,1995
was 9%.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash, short-term investments and restricted investments totaled $180.7
million at December 31, 1996, as compared to $129.2 million at March 31,
1996. Cash provided by operating activities was partially offset by the
reclassification of $47.3 million to restricted investments, a non-current
asset. The restricted investment balance relates to collateral requirements
under lease agreements entered into by Symantec during the current fiscal
year. Net cash provided by operating activities was $67.9 million and was
comprised of the Company's net income of $17.8 million and non-cash related
expenses of $26.4 million and an decrease in net assets and liabilities of
$23.7 million.
Trade accounts receivable increased $2.5 million from $72.3 million at March
31, 1996 to $74.8 million at December 31, 1996 primarily due to higher
revenue in the December 1996 quarter. Net inventories decreased $2.8 million
from $7.9 million at March 31, 1996 to $5.1 million at December 31, 1996.
The decrease in inventory balances was due to higher Delrina product
inventories at March 31, 1996.
Symantec has a $10.0 million bank line of credit that expires in March 1998.
The Company was in compliance with the line of credit covenants at December
31, 1996. At December 31, 1996, there were no borrowings outstanding under
this line and there was approximately $0.4 million of standby letters of
credit outstanding under this line of credit. 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
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
under the line of credit, there would not be a material adverse impact on the
financial results, liquidity or capital resources of the Company.
As of December 31, 1996, Symantec is obligated under lease agreements for two
office buildings in Cupertino, California, for which the Company is required
to maintain a restricted cash balance to be invested in U.S. treasury notes
with maturities not to exceed three years. In accordance with the lease
terms, these funds would not be available to meet operating cash
requirements. If the Company were to sustain significant operational losses,
it would be required the pursue of alternative financing options. Subsequent
to December 31, 1996, the Company entered into a lease agreement for land in
Cupertino, California, with a restricted cash balance requirement. The
restricted cash balance as of December 31, 1996 covers lease requirements for
both office buildings and the land and is unavailable for working capital
purposes.
Symantec may utilize significant amounts of cash in connection with the
potential acquisition of additional companies, capital equipment and software
product rights in the future. However, if the Company were to sustain
significant losses, there can be no assurances that the bank line of credit,
which is available through March 1998, would remain available. Additionally,
Symantec could be required to reduce operating expenses, which could result
in product delays; reassess acquisition opportunities, which could negatively
impact Symantec's growth objectives; and/or pursue other financing options.
Symantec believes existing cash and short-term investments will be sufficient
to fund operations for the next year.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is incorporated by reference to Note 6
of Notes to Consolidated Financial Statements included herein on page 9 of
this Form 10-Q.
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:
None
(b) Reports on Form 8-K
None
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
22
<PAGE>
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: February 10, 1997 SYMANTEC CORPORATION
By /s/ Robert R. B. Dykes
-------------------------------------------
Robert R. B.Dykes
Executive Vice President/Worldwide
Operations and Chief Financial Officer
(duly authorized officer)
/s/ Howard A. Bain III
-------------------------------------------
Howard A. Bain III
Vice President Finance and
Chief Accounting Officer
23
<PAGE>
EXHIBIT 11.01
SYMANTEC CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- ---------------------------
(In thousands, except per share data) 1996 1995 1996 1995
- ------------------------------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME (LOSS) PER SHARE
Net income (loss) $ 13,852 $ (36,806) $ 17,769 $ (47,726)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Weighted average number of common
shares outstanding during the period 54,814 53,107 54,501 52,391
Shares issuable from assumed exercise
of options 595 -- 663 --
----------- ---------- ---------- ----------
Common and common stock equivalent
shares outstanding for purpose of
calculating primary net income (loss)
per share 55,409 53,107 55,164 52,391
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Primary net income (loss) per share $ 0.25 $ (0.69) $ 0.32 $ (0.91)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
FULLY DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) $ 13,852 $ (36,806) $ 17,769 $ (47,726)
Interest expense on assumed conversion of
convertible subordinated debentures 177 -- 531 --
----------- ---------- ---------- ----------
Net income (loss), as adjusted $ 14,029 $ (36,806) $ 18,300 $ (47,726)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Weighted average number of common
shares outstanding during the period 54,814 53,107 54,501 52,391
Shares issuable from assumed exercise
of options 973 -- 982 --
Shares issuable from assumed conversion
of convertible subordinated debentures 1,250 -- 1,250 --
----------- ---------- ---------- ----------
Total shares for purpose of calculating
fully diluted net income (loss) per share 57,037 53,107 56,733 52,391
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Fully diluted net income (loss) per share $ 0.25 $ (0.69) $ 0.32 $ (0.91)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-27-1996
<CASH> 56,512
<SECURITIES> 79,926
<RECEIVABLES> 78,923
<ALLOWANCES> (4,171)
<INVENTORY> 5,090
<CURRENT-ASSETS> 236,111
<PP&E> 135,917
<DEPRECIATION> (82,829)
<TOTAL-ASSETS> 347,834
<CURRENT-LIABILITIES> 127,282
<BONDS> 15,228
0
0
<COMMON> 549
<OTHER-SE> 204,775
<TOTAL-LIABILITY-AND-EQUITY> 347,834
<SALES> 342,477
<TOTAL-REVENUES> 342,477
<CGS> 64,190
<TOTAL-COSTS> 64,190
<OTHER-EXPENSES> 261,620
<LOSS-PROVISION> 1,852
<INTEREST-EXPENSE> 1,020
<INCOME-PRETAX> 20,649
<INCOME-TAX> 2,880
<INCOME-CONTINUING> 17,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,769
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
