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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
JANUARY 2, 1998.
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
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 2,504,185 shares of Delrina exchangeable stock, as of
January 23, 1998:
COMMON STOCK, PAR VALUE $0.01 PER SHARE 56,576,453 SHARES
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SYMANTEC CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED JANUARY 2, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1997 and March 31, 1997......................................... 3
Consolidated Statements of Income
for the three and nine months ended December 31, 1997 and 1996..................... 4
Consolidated Statements of Cash Flow
for the nine months ended December 31, 1997 and 1996............................... 5
Notes to Consolidated Financial Statements.............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................. 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 24
Item 6. Exhibits and Reports on Form 8-K........................................................ 24
Signatures....................................................................................... 25
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMANTEC CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
(In thousands) 1997 1997
--------- ---------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments $ 183,898 $ 160,082
Trade accounts receivable 64,765 47,650
Inventories 3,920 4,476
Deferred income taxes 12,642 12,823
Other 17,709 13,166
--------- ---------
Total current assets 282,934 238,197
Long-term investments 34,552 --
Capitalized software 1,387 2,037
Equipment and leasehold improvements 50,239 51,610
Restricted investments 55,074 47,448
Other 2,697 2,381
--------- ---------
$ 426,883 $ 341,673
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,999 $ 30,328
Accrued compensation and benefits 19,327 16,241
Other accrued expenses 62,961 53,742
Income taxes payable 18,692 8,276
Current portion of long-term obligations 7 41
--------- ---------
Total current liabilities 134,986 108,628
Convertible subordinated debentures 14,284 15,000
Long-term obligations -- 66
Commitments and contingencies
Stockholders' equity:
Preferred stock (authorized: 1,000 shares; issued and outstanding: none) -- --
Common stock (authorized: 100,000; issued and outstanding: 56,456
and 55,427 shares) 565 554
Capital in excess of par value 294,711 291,548
Notes receivable from stockholders (144) (144)
Cumulative translation adjustment (12,071) (7,580)
Accumulated deficit (5,448) (66,399)
--------- ---------
Total stockholders' equity 277,613 217,979
--------- ---------
$ 426,883 $ 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 Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
(In thousands, except per 1997 1996 1997 1996
share data; unaudited) --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 148,240 $ 124,081 $ 422,269 $ 342,477
Cost of revenues 22,591 21,976 65,900 64,190
--------- --------- --------- ---------
Gross margin 125,649 102,105 356,369 278,287
Operating expenses:
Research and development 21,907 21,002 67,079 64,843
Sales and marketing 68,161 57,495 191,095 164,241
General and administrative 9,505 8,858 27,563 23,951
Acquisition, restructuring and
other expenses -- -- -- 8,585
--------- --------- --------- ---------
Total operating expenses 99,573 87,355 285,737 261,620
--------- --------- --------- ---------
Operating income 26,076 14,750 70,632 16,667
Interest income 3,290 1,556 9,458 4,991
Interest expense (318) (352) (897) (1,020)
Other income, net 67 343 721 11
--------- --------- --------- ---------
Income before income taxes 29,115 16,297 79,914 20,649
Provision for income taxes 7,279 2,445 18,963 2,880
--------- --------- --------- ---------
Net income $ 21,836 $ 13,852 $ 60,951 $ 17,769
========= ========= ========= =========
Net income per share - basic $ 0.39 $ 0.25 $ 1.09 $ 0.33
========= ========= ========= =========
Net income per share - diluted $ 0.37 $ 0.25 $ 1.02 $ 0.32
========= ========= ========= =========
Shares used to compute net income
per share - basic 56,277 54,814 55,891 54,501
========= ========= ========= =========
Shares used to compute net income
per share - diluted 60,100 56,659 59,991 55,164
========= ========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
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<TABLE>
<CAPTION>
Nine Months Ended
December 31,
--------------------------
(In thousands; unaudited) 1997 1996
--------- ---------
<S> <C> <C>
Operating Activities:
Net income $ 60,951 $ 17,769
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of equipment and
leasehold improvements 19,075 18,331
Amortization and write-off of capitalized software costs 1,137 3,277
Write-off of equipment and leasehold improvements 1,382 3,083
Deferred income taxes 65 1,730
Net change in assets and liabilities:
Trade accounts receivable (18,955) 8,956
Inventories 388 2,911
Other current assets (4,909) 2,969
Capitalized software costs 26 (7,660)
Other assets (398) 2,650
Accounts payable 4,875 2,322
Accrued compensation and benefits 3,257 3,147
Other accrued expenses 9,875 8,566
Income taxes payable 10,696 (182)
--------- ---------
Net cash provided by operating activities 87,465 67,869
--------- ---------
Investing Activities:
Capital expenditures (20,148) (22,742)
Purchased intangibles (554) (310)
Purchases of marketable securities (176,927) (140,000)
Proceeds from sales of marketable securities 129,526 150,497
Purchases of restricted investments (7,626) (47,262)
--------- ---------
Net cash used in investing activities (75,729) (59,817)
--------- ---------
Financing Activities:
Repurchase of Company's common stock (21,346) --
Net proceeds from sales of common stock and other 23,707 5,430
--------- ---------
Net cash provided by financing activities 2,361 5,430
Effect of exchange rate fluctuations on cash and cash equivalents (3,130) 1,253
--------- ---------
Increase in cash and cash equivalents 10,967 14,735
Beginning cash and cash equivalents 95,758 41,777
--------- ---------
Ending cash and cash equivalents $ 106,725 $ 56,512
========= =========
</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, 1997 and for the three and nine months ended
December 31, 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 28,
1997. The results of operations for the three and nine months ended December 31,
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 December 31, 1997, March 31, 1997 and December 31,
1996 reflect amounts as of and for the periods ended January 2, 1998, March 28,
1997 and December 27, 1996, respectively. The June 30, 1997 quarter comprised 14
weeks of operations, while the comparable prior year period comprised 13 weeks.
6
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31, March 31,
(In thousands) 1997 1997
--------- ---------
(unaudited)
<S> <C> <C>
Cash and short-term investments:
Cash $ 34,537 $ 33,755
Cash equivalents 72,188 62,003
Short-term investments 77,173 64,324
--------- ---------
$ 183,898 $ 160,082
========= =========
Trade accounts receivable:
Receivables $ 69,104 $ 51,950
Less: allowance for doubtful accounts (4,339) (4,300)
--------- ---------
$ 64,765 $ 47,650
========= =========
Inventories:
Raw materials $ 1,809 $ 1,736
Finished goods 2,111 2,740
--------- ---------
$ 3,920 $ 4,476
========= =========
Equipment and leasehold improvements:
Computer equipment $ 102,732 $ 91,533
Office furniture and equipment 29,171 27,706
Leasehold improvements 20,774 17,697
--------- ---------
152,677 136,936
Less: accumulated depreciation and amortization (102,438) (85,326)
--------- ---------
$ 50,239 $ 51,610
========= =========
Capitalized software:
Purchased product rights $ 966 $ 591
Capitalized software costs 2,406 2,465
Less: accumulated amortization of purchased product rights (458) (55)
Less: accumulated amortization of capitalized software costs (1,527) (964)
--------- ---------
$ 1,387 $ 2,037
========= =========
Other accrued expenses:
Deferred revenue $ 24,906 $ 13,825
Marketing development funds 12,686 12,529
Other 25,369 27,388
--------- ---------
$ 62,961 $ 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 Nine Months Ended
December 31, December 31,
------------------------------- -------------------------
(In thousands) 1997 1996 1997 1996
------------ ------------ ------------ ------
<S> <C> <C> <C> <C>
Write off of investment in joint venture $ -- $ -- $ -- $1,750
Write off of in-process research and
development costs -- -- -- 3,050
Centralization, restructuring and other -- -- -- 3,185
Fast Track, Inc. acquisition -- -- -- 600
------------ ------------ ------------ ------
Total acquisition, restructuring and
other expenses $ -- $ -- $ -- $8,585
============ ============ ============ ======
</TABLE>
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 13, 1997, following Symantec's
motions directed 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 has
filed a motion to dismiss the federal complaint, which is under submission with
the court. 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 of Trio's C-Index code in its
Norton Utilities, Norton Your Eyes Only and pcANYWHERE products. The lawsuit was
settled on December 19, 1997 on terms that were not material to Symantec.
On April 23, 1997, Symantec filed a lawsuit against McAfee Associates, Inc.,
which pursuant to a merger has become Network Associates, Inc. ("Network
Associates"), 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 Network Associates from infringing Symantec's rights in specified
materials by marketing, selling, transferring or directly or indirectly copying
into any new Network Associates product or new version of an existing product
that has Symantec code, (ii) requiring Network Associates 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 Network Associates 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 Network
Associates 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.
8
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On May 13, 1997, Trend Micro Incorporated ("Trend") filed a lawsuit in the
United States District Court, Northern District of California, against Symantec
Corporation and Network Associates, alleging patent infringement. Trend claims
that Norton AntiVirus for Internet E-mail Gateways and Norton AntiVirus for
Firewalls infringe a patent owned by Trend. 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, Network Associates 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
alleged that damages to Network Associates could result in damages of $1
billion. Network Associates dismissed the lawsuit on or about December 30, 1997.
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 a patent 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.
On February 4, 1998, CyberMedia, Inc., filed a lawsuit in the United States
District Court for the Northern District of California against Symantec
Corporation, ZebraSoft Inc., and others, alleging that Symantec Norton Uninstall
Deluxe infringes CyberMedia's copyright, and asserting related state law claims.
The suit requests damages, injunctive relief, costs and attorneys 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 results of operations and financial condition 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.
Additionally, on November 24, 1997, the Board of Directors of Symantec
authorized the repurchase of up to 500,000 shares of Symantec common stock. As
of December 4, 1997 management completed the repurchase of 500,000 shares at
prices ranging from $25.25 to $26.81 per share.
9
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 6. EARNINGS PER SHARE
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. As a result, the Company has changed the method used to
compute earnings per share and has restated all prior periods.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ---------------------
(In thousands, except per share data) 1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC NET INCOME PER SHARE
Net income $21,836 $13,852 $60,951 $17,769
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period 56,277 54,814 55,891 54,501
======= ======= ======= =======
Basic net income per share $ .39 $ .25 $ 1.09 $ .33
======= ======= ======= =======
DILUTED NET INCOME PER SHARE
Net income $21,836 $13,852 $60,951 $17,769
Interest on convertible subordinated
debentures, net of income tax effect 169 177 523 --
------- ------- ------- -------
Net income, as adjusted $22,005 $14,029 $61,474 $17,769
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period 56,277 54,814 55,891 54,501
Shares issuable from assumed exercise
of options 2,633 595 2,870 663
Shares issuable from assumed conversion
of convertible subordinated debentures 1,190 1,250 1,230 --
------- ------- ------- -------
Total shares for purpose of calculating
diluted net income per share 60,100 56,659 59,991 55,164
======= ======= ======= =======
Diluted net income per share $ .37 $ .25 $ 1.02 $ .32
======= ======= ======= =======
</TABLE>
For the nine months ended December 31, 1996, 1,250,000 shares of convertible
subordinated debentures and $531,000 of interest expense were excluded from the
computation of diluted net income per share because the effect would be
antidilutive.
NOTE 7. PARTIAL CONVERSION OF OUTSTANDING CONVERTIBLE SUBORDINATED DEBENTURES
During October 1997, a holder of Symantec's Convertible Subordinated Debentures
converted $716,000 principal amount of such debentures into 59,666 shares of
Symantec Common Stock. The conversion of these shares of Common Stock were
issued in a transaction which was exempt from registration under the Securities
Act of 1933.
10
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENT ACCOUNTING POLICY
In January 1997, the Securities and Exchange Commission 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
(both quantitative and qualitative) outside the financial statements. The
expanded accounting policy disclosure for derivatives is as follows:
Symantec utilizes natural hedging to mitigate the Company's transaction
exposures and hedges 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 minimize currency
exchange risks associated with certain firmly committed transactions. All
foreign exchange forward contracts are designated effective as a hedge and are
highly correlated to the hedged item as required by generally accepted
accounting principles.
Gains and losses on the contracts are included in other income (loss) 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 (loss) 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 (loss) in the same period. The fair value of foreign
currency exchange forward contracts approximates cost due to the short maturity
periods.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued 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 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. SFAS 130 and SFAS 131 will not have a
material impact on the financial condition or results of operations of the
Company.
In October 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," which provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions and is effective for Symantec's transactions
entered into subsequent to April 3, 1998.
Based upon Symantec's reading and interpretation of SOP 97-2, the Company does
not believe that the implementation of SOP 97-2 will have a material adverse
affect on expected revenues or earnings. However, detailed implementation
guidelines for this standard have not yet been issued. Once issued, such
detailed guidance could lead to unanticipated changes in the Company's current
revenue accounting practices and material adverse changes in the Company's
reported revenues and earnings. In the event implementation guidance is contrary
to the Company's revenue accounting practices, the Company believes it can
change its current business practices to comply with this guidance and avoid any
material adverse effect on reported revenues and earnings. However, there can be
no assurance this will be the case.
11
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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. Accordingly, all references as
of and for the periods ended December 31, 1997, March 31, 1997 and December 31,
1996 reflect amounts as of and for the periods ended January 2, 1998, March 28,
1997 and December 27, 1996, respectively. The June 30, 1997 quarter comprised 14
weeks of operations, while the comparable prior year period comprised 13 weeks.
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 28, 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.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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.
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 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.
ACQUIRED COMPANIES. 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.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
QUARTERLY BUYING PATTERNS: ABSENCE OF BACKLOG. Most 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 is particulary true of large corporate customers that
negotiate large site licenses near the end of each quarter. 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 occur at lower prices or on
less favorable terms to the Company.
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.
DISTRIBUTION CHANNELS. 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.
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.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Channel fill did not have a material impact on the Company's revenues in the
June, September, and December 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.
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
product inventory levels in the channel, and takes into consideration upcoming
product upgrades, current market conditions 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.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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' or investors' expectations in the periods following the introduction
of existing or new operating systems.
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 a number
of 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 (See Note 4 of Notes to
Consolidated Financial Statements).
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.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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.
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.
YEAR 2000. The Company, in conjunction with outside consultants, has completed
an assessment of its computer systems and software and will have to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The scope of the
assessment includes the Company's interface systems with significant suppliers
and other third parties; however, there can be no guarantee that the systems of
other companies with which Symantec does business will be timely converted and
will not have an adverse effect on Symantec's systems. In addition, there can be
no assurance that the systems of all the companies with which Symantec does
business will be timely converted, and as a result, there could be disruption in
business transactions with the Symantec's suppliers and customers. Certain of
Symantec's products have been tested and validated as Year 2000 compliant.
The year 2000 project cost is not expected to be material. The project is
estimated to be significantly completed during the 1998 calendar year, which is
prior to any anticipated impact on its operating systems. The Company believes
that with modifications to existing software and conversions to new software,
the year 2000 issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not made,
or are not completed timely, the Year 2000 issue could have a material adverse
impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, unforeseen circumstances causing the
Company to allocate its resources elsewhere, and similar uncertainties.
Additionally, as testing of Year 2000 functionality of the Company's systems
must occur in a simulated environment, the Company will not be able to test full
system Year 2000 interfaces and capabilities prior to Year 2000. The Company
believes that its exposure on Year 2000 issues is not material to its
business as a whole.
17
<PAGE> 18
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
------------------ ------------------
1997 1996 Amounts 1997 1996 Amounts
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net revenues................................... 100% 100% 19% 100% 100% 23%
Cost of revenues............................... 15 18 3 16 19 3
------- ------- ------- -------
Gross margin............................ 85 82 23 84 81 28
Operating expenses:
Research and development.................. 15 17 4 16 19 3
Sales and marketing....................... 46 46 19 45 48 16
General and administrative................ 6 7 7 6 7 15
Acquisition, restructuring and
other expenses.......................... -- -- 0 -- 2 (100)
------- ------- ------- -------
Total operating expenses................ 67 70 14 67 76 9
------- ------- ------- -------
Operating income............................... 18 12 77 17 5 324
Interest income................................ 2 1 111 2 1 90
Interest expense............................... -- -- (10) -- -- (12)
Other income (expense), net.................... -- -- (80) -- -- 6,455
------- ------- ------- -------
Income before income taxes.................... 20 13 79 19 6 287
Provision for income taxes .................... 5 2 198 5 1 558
------- ------- ------- -------
Net income .................................... 15% 11% 58 14% 5% 243
======= ======= ======= =======
</TABLE>
NET REVENUES.
Net revenues increased 19% from $124 million in the quarter ended December 31,
1996 to $148 million in the quarter ended December 31, 1997. Net revenues
increased 23% from $342 million for the nine month period ended December 31,
1996 to $422 million for the nine month period ended December 31, 1997. During
the comparative three and nine month periods ended December 31, 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 for the comparable three
month December periods were primarily related to sales of Norton Utilities for
Windows 95 version 3.0 and a new product, Norton Uninstaller. Increased net
revenues for the comparable nine month December periods were primarily related
to Windows 95, Windows NT and Macintosh versions of Norton Utilities, Norton
AntiVirus for multi-platform workstations/servers, and Norton Uninstaller. Net
revenues from the Security and Assistance business unit comprised approximately
50% of net revenues for the December 1997 and 1996 three and nine month periods.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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 nine
month December periods primarily resulted from increased sales of pcANYWHERE for
Windows 95 and WinFax Pro for Windows 95. Net revenues from the Remote
Productivity Solutions group comprised approximately 40% of the Company's net
revenues for the December 1997 three and nine month periods, compared to 35% for
the December 1996 three and nine month periods.
The remaining 10% of the Company's revenue for the December 1997 three and nine
month periods and 15% of net revenue for the December 1996 three and nine 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 offset by decreases in revenues from products nearing the
end of their life cycles. A majority of this revenue for the three and nine
month periods ended December 31, 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
28, 1997, Consolidated Financial Statements, Note 9 - Sale of Product Rights.
Net revenues from international sales were approximately $51 million and $38
million and represented 34% and 31% of total net revenues in the December 1997
and 1996 quarters, respectively. Net revenues between comparable December
quarters increased by 34% in Europe, 32% in Asia Pacific, 35% in Japan and 61%
in Latin America. During the current fiscal year, the Company has increased its
sales and marketing presence and number of localized products in the Asia
Pacific and Latin America regions. Net revenues from international sales were
approximately $132 million and $103 million in the nine month periods ended
December 31, 1997 and 1996, respectively, and represented approximately 31% and
30% of total net revenues in the nine month periods ended December 31, 1997 and
1996, respectively. Symantec's revenues were not materially impacted by recent
currency fluctuations. The Company does not currently expect business conditions
in the Asia Pacific region to have a material adverse affect on its results of
operations.
GROSS MARGIN.
Gross margin represents net revenues less cost of revenues. Cost of revenues
consists primarily of direct materials, manufacturing expenses, royalties paid
to third party developers under licensing agreements and amortization and
write-off of capitalized software.
Gross margins were 85% and 82% for the three month periods ended December 31,
1997 and 1996, respectively, and 84% and 81% for the nine month periods ended
December 31, 1997 and 1996, respectively.
Factors contributing to an increase in gross margin percentage during the three
and nine month periods ended December 31, 1997 include reduction of direct
material costs by shifting product media format from diskettes to CD ROM on
certain products, reduction in manufacturing overhead costs due to improved
economies of scale, and reduction in software amortization expense due to the
write-off of a significant portion of Symantec's capitalized software
development costs during the March 1997 quarter.
Additionally, total revenues received by Symantec from JetForm and
Hewlett-Packard during the three and nine month periods ended December 31, 1997
increased from total revenues received from JetForm and miscellaneous software
development services during the three and nine month periods ended December 31,
1996. These increased revenues contributed to increases in gross margin for the
comparable periods as there were minimal costs associated with these revenue
streams.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESEARCH AND DEVELOPMENT EXPENSES.
Research and development expenses totaled approximately $22 million or 15% of
net revenues in the quarter ended December 31, 1997 and approximately $21
million or 17% of net revenues in the quarter ended December 31, 1996. Research
and development expenses totaled approximately $67 million or 16% of net
revenues for the nine month period ended December 31, 1997 and approximately $65
million or 19% of net revenues in the nine month period ended December 31, 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 largely 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, which was partially offset by
increases in new product development efforts.
During the three and nine month periods ended December 31, 1996, Symantec's
research and development costs were reduced by the capitalization of
approximately $2 million and $8 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, accounting standards related to capitalization of
software development costs did not materially affect the Company.
SALES AND MARKETING EXPENSES.
Sales and marketing expenses totaled approximately $68 million or 46% of net
revenues in the quarter ended December 31, 1997 and approximately $57 million or
46% of net revenues in the quarter ended December 31, 1996. Sales and marketing
expenses totaled approximately $191 million or 45% of net revenues for the nine
month period ended December 31, 1997 and approximately $164 million or 48% of
net revenues in the quarter ended December 31, 1996. The increase in sales and
marketing expense between the comparable three and nine month December periods
is primarily related to increased sales and marketing activities in the Europe,
Asia Pacific and Japan regions, as well as new product releases and upgrade
launches.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses increased to approximately $10 million and
$28 million in the three and nine month periods ended December 31, 1997,
respectively, from approximately $9 million and $24 million in the three and
nine month periods ended December 31, 1996, respectively. General and
administrative expenses were approximately 6% and 7% of net revenues for the
three month periods ended December 31, 1997 and 1996, respectively, and
approximately 6% and 7% for the nine month periods ending December 31, 1997 and
1996, respectively. The absolute dollar increase in these expenses related to
increased business activities for the three and nine month comparable December
1997 and 1996 periods.
ACQUISITION, RESTRUCTURING AND OTHER EXPENSES.
There were no acquisition, restructuring or other expenses recorded during the
three and nine month periods ended December 31, 1997. During the nine month
period ended December 31, 1996, Symantec recorded approximately $9 million of
acquisition charges, including the approximately $2 million write off of an
investment in a joint venture, approximately $3 million charge in connection
with the acquisition of certain in process software development technology and
approximately $4 million for costs related to the restructuring and
centralization of certain operations and other non-recurring expenses.
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME (EXPENSE).
Interest income was approximately $3 million and $2 million in the quarters
ended December 31, 1997 and 1996, respectively, and $9 million and $5 million
for the nine months ended December 31, 1997 and 1996, respectively. The increase
in interest income for the three and nine month periods is due to higher average
invested cash balances.
Interest expense was $0.3 million and $0.4 million in the quarters ended
December 31, 1997 and 1996, respectively, and $0.9 million and $1.0 million for
the nine months ended December 31, 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 natural hedging to mitigate
Symantec's transaction exposures and hedges certain residual transaction
exposures through the use of one-month forward contracts. There were no
significant gains or losses for the quarter ended December 31, 1997 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, 1997 was
approximately 24%, 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 expects that the effective tax rate will increase in future periods
after the Company has utilized its previously unbenefitted net operating losses
and tax credits. The effective tax provision for the nine months ended December
31, 1996 was approximately 14%.
LIQUIDITY AND CAPITAL RESOURCES
Cash, short-term investments and long-term investments increased $58 million to
approximately $218 million at December 31, 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.
In addition to cash, short-term investments and long-term investments of $218
million, the Company has $55 million of restricted investments related 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 securities with weighted average maturity not to
exceed two 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 $87 million and was
comprised of the Company's net income of $61 million and non-cash related
expenses of $21 million and a net decrease in assets and liabilities of $5
million.
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Trade accounts receivable increased $17 million from approximately $48 million
at March 31, 1997 to approximately $65 million at December 31, 1997 primarily
due to new product releases and strong sales during the December 1997 quarter,
particularly European sales during the last two weeks of the 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.
On November 24, 1997, the Board of Directors of Symantec authorized the
repurchase of up to 500,000 shares of Symantec common stock. As of December 4,
1997 management completed the repurchase of 500,000 shares at prices ranging
from $25.25 to $26.81 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 December 31, 1997. At
December 31, 1997, there were no borrowings outstanding under this line and
there were approximately $0.2 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.
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
23
<PAGE> 24
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 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:
27.01Financial Data Schedule
(b) Reports on Form 8-K
None
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
24
<PAGE> 25
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 13, 1998 SYMANTEC CORPORATION
By [s] Howard A. Bain III
------------------------------------------
Howard A. Bain III
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
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SYMANTEC
CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTH PERIOD ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-03-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> JAN-02-1998
<CASH> 106,725
<SECURITIES> 77,173
<RECEIVABLES> 69,104
<ALLOWANCES> (4,339)
<INVENTORY> 3,920
<CURRENT-ASSETS> 282,934
<PP&E> 152,677
<DEPRECIATION> (102,438)
<TOTAL-ASSETS> 426,883
<CURRENT-LIABILITIES> 134,986
<BONDS> 14,284
0
0
<COMMON> 565
<OTHER-SE> 277,048
<TOTAL-LIABILITY-AND-EQUITY> 426,883
<SALES> 422,269
<TOTAL-REVENUES> 422,269
<CGS> 65,900
<TOTAL-COSTS> 65,900
<OTHER-EXPENSES> 285,737
<LOSS-PROVISION> 743
<INTEREST-EXPENSE> 897
<INCOME-PRETAX> 79,914
<INCOME-TAX> 18,963
<INCOME-CONTINUING> 60,951
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,951
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.02
</TABLE>
