<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
------- OCTOBER 1, 1999.
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)
<TABLE>
<S> <C>
DELAWARE 77-0181864
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
20330 STEVENS CREEK BLVD.
CUPERTINO, CALIFORNIA 95014-2132
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 253-9600
</TABLE>
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 1,502,345 shares of Delrina exchangeable stock, as
of October 29, 1999:
COMMON STOCK, PAR VALUE $0.01 PER SHARE 58,142,899 SHARES
<PAGE> 2
SYMANTEC CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED OCTOBER 1, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 1999 and March 31, 1999....................... 3
Condensed Consolidated Statements of Income
for the three and six months ended September 30, 1999 and 1998.... 4
Condensed Consolidated Statements of Cash Flow
for the three and six months ended September 30, 1999 and 1998.... 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 34
Item 4. Submission of Matters to a Vote of Security Holders.................... 34
Item 6. Exhibits and Reports on Form 8-K....................................... 35
Signatures...................................................................... 36
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
(In thousands) 1999 1999
- -------------- ------------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 210,259 $ 192,755
Trade accounts receivable 81,512 76,386
Inventories 6,451 6,377
Deferred income taxes 27,468 28,155
Other 12,295 12,790
--------- ---------
Total current assets 337,985 316,463
Long-term investments -- 4,270
Restricted investments 78,577 71,405
Equipment and leasehold improvements, net 56,079 52,887
Purchased product rights and capitalized software, net 37,322 36,209
Goodwill, net 100,820 75,224
Other 10,517 7,018
--------- ---------
$ 621,300 $ 563,476
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 47,400 $ 45,862
Accrued compensation and benefits 24,032 20,788
Deferred revenue 81,661 55,965
Other accrued expenses 52,002 75,954
Income taxes payable 1,531 18,339
--------- ---------
Total current liabilities 206,626 216,908
Long-term obligations 909 1,455
Commitments and contingencies
Stockholders' equity:
Preferred stock (authorized: 1,000; issued and outstanding: none) -- --
Common stock (authorized: 100,000; issued and outstanding: 57,638
and 56,872 shares, respectively) 576 569
Capital in excess of par value 340,272 315,698
Notes receivable from stockholders (24) (144)
Unearned compensation (1,001) --
Retained earnings 89,513 48,100
Accumulated other comprehensive loss (15,571) (19,110)
--------- ---------
Total stockholders' equity 413,765 345,113
--------- ---------
$ 621,300 $ 563,476
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE> 4
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- -------------------------
(In thousands, except per share data; unaudited) 1999 1998 1999 1998
- ------------------------------------------------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 182,535 $ 130,034 $ 357,673 $ 267,804
Cost of revenues 30,642 21,337 61,265 41,620
--------- --------- --------- ---------
Gross margin 151,893 108,697 296,408 226,184
Operating expenses:
Research and development 27,337 25,757 54,909 50,736
Sales and marketing 75,904 70,556 149,427 140,397
General and administrative 9,968 10,124 18,754 19,256
Amortization of goodwill 5,169 827 9,104 1,102
Amortization of intangibles from acquisitions 227 5 407 7
Acquired in-process research and development 1,200 5,017 1,200 19,165
Restructuring and other expenses 40 5,105 2,813 5,105
Litigation judgment -- -- -- 5,825
--------- --------- --------- ---------
Total operating expenses 119,845 117,391 236,614 241,593
--------- --------- --------- ---------
Operating income (loss) 32,048 (8,694) 59,794 (15,409)
Interest income 2,471 3,992 4,713 8,481
Interest expense -- (320) (22) (651)
Income, net of expense, from sale of
technologies and product lines 5,010 10,027 9,900 25,348
Other (expense) income, net (397) (522) 211 2,080
--------- --------- --------- ---------
Income before income taxes 39,132 4,483 74,596 19,849
Provision for income taxes 13,300 2,538 25,037 10,289
--------- --------- --------- ---------
Net income $ 25,832 $ 1,945 $ 49,559 $ 9,560
========= ========= ========= =========
Net income per share - basic $ 0.45 $ 0.03 $ 0.87 $ 0.17
========= ========= ========= =========
Net income per share - diluted $ 0.43 $ 0.03 $ 0.84 $ 0.16
========= ========= ========= =========
Shares used to compute net income
per share - basic 57,034 57,071 56,697 57,246
========= ========= ========= =========
Shares used to compute net income
per share - diluted 60,395 58,762 59,333 59,421
========= ========= ========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE> 5
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended
September 30,
------------------------
(In thousands; unaudited) 1999 1998
- ------------------------- ---- ----
<S> <C> <C>
Operating Activities:
Net income $ 49,559 $ 9,560
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of equipment and
leasehold improvements 12,876 12,433
Amortization and write-off of capitalized software development costs 6,194 1,989
Amortization of goodwill 9,104 1,102
Write-off of acquired in-process research and development 1,200 19,165
Deferred income taxes (1,781) (2,177)
Net change in assets and liabilities, excluding effects of acquisitions:
Trade accounts receivable (5,029) 584
Inventories (100) (1,072)
Other current assets 571 3,150
Other assets (512) 165
Accounts payable 1,322 3,528
Accrued compensation and benefits 4,402 (1,912)
Deferred revenue and other accrued expenses 21,955 10,704
Income taxes payable (16,692) (14,692)
Income tax benefit from stock options 7,000 --
--------- ---------
Net cash provided by operating activities 90,069 42,527
--------- ---------
Investing Activities:
Capital expenditures (15,804) (13,362)
Purchased product rights and capitalized software (700) (2,376)
Purchase of URLabs (42,100) --
Cash paid to Quarterdeck shareholders (16,394) --
Payment on purchase of IBM's anti-virus business (4,000) (8,000)
Purchase of Binary Research Limited's operations -- (27,500)
Purchases of marketable securities (20,110) (122,070)
Proceeds from sales of marketable securities 42,551 118,101
Proceeds from sales of long-term investments 4,270 --
Purchases of long-term, restricted investments (7,172) (7,666)
--------- ---------
Net cash used in investing activities (59,459) (62,873)
--------- ---------
Financing Activities:
Repurchase of common stock (18,726) (39,834)
Net proceeds from sales of common stock and other 25,859 11,248
Principal payments on long-term obligations (546) --
--------- ---------
Net cash provided by (used in) financing activities 6,587 (28,586)
--------- ---------
Effect of exchange rate fluctuations on cash and cash equivalents 1,672 (7,766)
--------- ---------
Increase (decrease) in cash and cash equivalents 38,869 (56,698)
Beginning cash and cash equivalents 153,873 139,013
--------- ---------
Ending cash and cash equivalents $ 192,742 $ 82,315
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE> 6
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Symantec Corporation
("Symantec" or the "Company") as of September 30, 1999, and for the three and
six months ended September 30, 1999 and 1998, 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 condensed 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, 1999. The results of operations for the three and
six months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the entire year. All significant intercompany
accounts and transactions have been eliminated. Certain previously reported
amounts have been reclassified to conform to the current presentation format.
Symantec has a 52/53-week fiscal accounting year. Accordingly, all references as
of and for the periods ended September 30, 1999, March 31, 1999 and September
30, 1998 reflect amounts as of and for the periods ended October 1, 1999, April
2, 1999 and October 2, 1998, respectively. The three months ended September 30,
1999 and 1998 comprised 13 weeks of activity. The six months ended September 30,
1999 and 1998 comprised 26 weeks of activity.
During the September 1999 quarter, the Company acquired Unified Research
Laboratories, Inc. (URLabs), an internet access control and email scanning
company based in Hampton, Virginia. During the December 1998 quarter, the
Company completed its tender offer for 63% interest in Quarterdeck Corporation
(Quarterdeck). In the March 1999 quarter, the Company acquired the remaining 37%
interest in Quarterdeck. During the September 1998 quarter, the Company acquired
Intel Corporation's (Intel) anti-virus business. During the June 1998 quarter,
the Company acquired International Business Machine's (IBM) anti-virus business
and the operations of Binary Research Limited (Binary) (See Note 9 of Notes to
Condensed Consolidated Financial Statements in this Form 10-Q.) Each of these
acquisitions was accounted for as a purchase. The results of operations from
these acquisitions have been included in Symantec's results of operations from
their respective dates of acquisition.
6
<PAGE> 7
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
September 30, March 31,
(In thousands) 1999 1999
- -------------- --------- ---------
(unaudited)
<S> <C> <C>
Cash, cash equivalents and short-term investments:
Cash $ 87,454 $ 41,031
Cash equivalents 105,288 112,842
Short-term investments 17,517 38,882
--------- ---------
$ 210,259 $ 192,755
========= =========
Trade accounts receivable:
Receivables $ 86,761 $ 81,332
Less: allowance for doubtful accounts (5,249) (4,946)
--------- ---------
$ 81,512 $ 76,386
========= =========
Inventories:
Raw materials $ 2,078 $ 1,887
Finished goods 4,373 4,490
--------- ---------
$ 6,451 $ 6,377
========= =========
Equipment and leasehold improvements, net:
Computer hardware and software $ 147,812 $ 134,745
Office furniture and equipment 35,108 33,705
Leasehold improvements 23,900 22,516
--------- ---------
206,820 190,966
Less: accumulated depreciation and amortization (150,741) (138,079)
--------- ---------
$ 56,079 $ 52,887
========= =========
Purchased product rights and capitalized software, net:
Purchased product rights and technologies $ 53,092 $ 47,181
Capitalized software development costs 2,392 2,377
Less: accumulated amortization of purchased product rights (15,814) (11,112)
Less: accumulated amortization of capitalized software costs (2,348) (2,237)
--------- ---------
$ 37,322 $ 36,209
========= =========
Goodwill, net:
Goodwill $ 116,100 $ 81,400
Less: accumulated amortization (15,280) (6,176)
--------- ---------
$ 100,820 $ 75,224
========= =========
Accumulated other comprehensive loss:
Unrealized loss on available-for-sale investments $ (141) $ (304)
Cumulative translation adjustment (15,430) (18,806)
--------- ---------
$ (15,571) $ (19,110)
========= =========
</TABLE>
7
<PAGE> 8
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3. NET INCOME PER SHARE
The components of net income per share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
(In thousands, except per share data; unaudited) 1999 1998 1999 1998
- ------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC NET INCOME PER SHARE
Net income $25,832 $ 1,945 $49,559 $ 9,560
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period 57,034 57,071 56,697 57,246
======= ======= ======= =======
Basic net income per share $ 0.45 $ 0.03 $ 0.87 $ 0.17
======= ======= ======= =======
DILUTED NET INCOME PER SHARE
Net income $25,832 $ 1,945 $49,559 $ 9,560
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period 57,034 57,071 56,697 57,246
Shares issuable from assumed exercise
of options 3,361 1,691 2,636 2,175
------- ------- ------- -------
Total shares for purpose of calculating
diluted net income per share 60,395 58,762 59,333 59,421
======= ======= ======= =======
Diluted net income per share $ 0.43 $ 0.03 $ 0.84 $ 0.16
======= ======= ======= =======
</TABLE>
For the three months ended September 30, 1998, 1,190,000 shares issuable upon
the assumed conversion of convertible subordinated debentures and approximately
$0.2 million of interest expense were excluded from the computation of diluted
net income per share because the effect would have been anti-dilutive. For the
six months ended September 30, 1998, 1,190,000 shares issuable upon the assumed
conversion of convertible subordinated debentures and approximately $0.3 million
of interest expense were excluded from the computation of diluted net income per
share because the effect would have been anti-dilutive.
8
<PAGE> 9
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 4. RESTRUCTURING AND OTHER EXPENSES
Restructuring and other expenses consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
(In thousands; unaudited) 1999 1998 1999 1998
- -------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Personnel severance $ 40 $3,800 $2,813 3,800
Planned abandonment of manufacturing
facility lease -- 1,305 -- 1,305
------ ------ ------ ------
Total restructuring and other expenses $ 40 $5,105 $2,813 $5,105
====== ====== ====== ======
</TABLE>
In the quarter ended June 1999, the Company provided for certain costs of
approximately $2.4 million related to an agreement reached with its former CEO
and other restructuring costs associated with certain regions of the Company.
During the quarter ended September 30, 1998, the Company made a decision to
restructure its operations and outsource its domestic manufacturing operations.
As a result, it recorded a $3.8 million charge for personnel severance to reduce
the workforce by approximately 5% in both domestic and international operations
and a $1.3 million charge for the planned abandonment of a manufacturing
facility lease. As of September 30, 1999, approximately $4.5 million of these
charges had been incurred, and the remaining $0.6 million was no longer
considered necessary. As a result, the Company reduced the personnel severance
accrual by $0.6 million. Also during the quarter ended September 30, 1999, the
Company provided severance of approximately $0.7 million for certain of its
employees due to the realignment of its business units. As a result of these
events in the September 1999 quarter, the net charge to personnel severance was
approximately $40,000.
NOTE 5. COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- --------------------
(In thousands; unaudited) 1999 1998 1999 1998
- --------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 25,832 $ 1,945 $ 49,559 $ 9,560
Other comprehensive income (loss):
Change in unrealized gain (loss) on
available-for-sale investments,
net of a tax (benefit) provision of ($3),
($98), $68, and ($38) (7) (208) 145 (80)
Reclassification adjustment for (gains)
losses included in net income,
net of a tax provision (benefit) of $63,
($8) and $146 -- (133) 18 (310)
Change in cumulative translation adjustment (CTA),
net of a tax provision (benefit) of $1,644,
($619), $1,589, and ($2,477) 3,494 (1,315) 3,376 (5,263)
-------- -------- -------- --------
Total other comprehensive income (loss) 3,487 (1,656) 3,539 (5,653)
-------- -------- -------- --------
Comprehensive income $ 29,319 $ 289 $ 53,098 $ 3,907
======== ======== ======== ========
</TABLE>
9
<PAGE> 10
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 6. RESTRICTED STOCK
In April 1999, the Company issued 100,000 shares of restricted common stock to
its new CEO. Unearned compensation of approximately $1.3 million, equivalent to
the market value of the common stock on the date of grant was charged to
stockholders' equity and will subsequently be amortized over 2 years, the
vesting period of the restricted common stock. For the three and six months
ended September 30, 1999, the Company recorded approximately $0.2 million and
$0.3 million, respectively, of expense, relating to the restricted common stock.
NOTE 7. LITIGATION AND CONTINGENCIES
On March 18, 1996, a class action complaint was filed by the law firm of
Milberg, Weiss, Bershad, Hynes & Lerach in the 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 Company's stock price and then sold stock based on inside
information that the Company's 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 demurrers directed to previous complaints. On January
7, 1997, the same plaintiffs filed a complaint in the United States District
Court, Northern District of California, based on the same facts as the state
court complaint, for violation of the Securities Exchange Act of 1934. The
district court dismissed that complaint and plaintiffs served an amended
complaint in April 1998. Symantec's motion to dismiss the new federal complaint
was granted in part, substantially narrowing the complaint. In July 1999, the
parties reached an agreement in principle to settle these cases on terms that
would have no material financial impact on the Company. In October 1999, the
Federal Court approved the settlement. As of September 30, 1999, the Company
believes it has adequately accrued for the settlement and related legal costs.
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. On April 1, 1998, Symantec amended its complaint to add
claims for misappropriation of trade secrets, RICO (Racketeer Influenced and
Corrupt Organizations Act) and related claims based on additional evidence
uncovered in the litigation. Following motions by Network Associates, the court
dismissed Symantec's unfair competition and trade secret claims regarding the
copyrighted code and its RICO and interference claims. On October 22, 1998, the
court consolidated this case with the case against Network Associates and the
case brought by CyberMedia, both of which are described below.
On September 4, 1998, Symantec filed a new lawsuit against Network Associates in
the United States District Court, Northern District of California, for copyright
infringement, trade secret misappropriation and unfair competition. 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.
On September 15, 1997, Hilgraeve Corporation (Hilgraeve) filed a lawsuit in the
United States District Court, Eastern District of Michigan, against Symantec,
alleging that unspecified Symantec products infringe a patent
10
<PAGE> 11
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
owned by Hilgraeve. The lawsuit requests damages, injunctive relief, costs and
attorney fees. Symantec believes this claim has no merit and intends to defend
the action vigorously.
On February 4, 1998, CyberMedia, Inc. (CyberMedia), which in September 1998 was
acquired by Network Associates, filed a lawsuit in the United States District
Court, Northern District of California, against Symantec, ZebraSoft Inc. and
others, alleging that Symantec's Norton Uninstall Deluxe infringes CyberMedia's
copyright and asserting related state law claims. The suit requests damages,
injunctive relief, costs and attorneys fees. In May 1998, CyberMedia filed a
motion seeking a preliminary injunction prohibiting sale or development of the
challenged code, which preliminary injunction was granted with respect to
Symantec's domestic activities in September 1998. Subsequently, Symantec ceased
selling the Norton Uninstall Deluxe product. Symantec intends to defend the
action vigorously.
On February 19, 1998, a class action complaint was filed by the law firm of
Milberg, Weiss, Bershad, Hynes & Lerach in Santa Clara County Superior Court, on
behalf of a class of purchasers of pre-version 4.0 Norton AntiVirus products. A
similar complaint was filed in the same court on March 6, 1998, by an Oregon law
firm. Those actions were consolidated and a consolidated amended complaint was
filed in late October 1998. The complaint originally purported to assert claims
for breach of implied warranty, fraud, unfair business practices and violation
of California's Consumer Legal Remedies Act, among others, arising from the
alleged inability of earlier versions of Norton AntiVirus to function properly
after the year 2000. All but the unfair business practice claims have been
dismissed following Symantec's demurrer. The complaint seeks unspecified damages
and injunctive relief. Symantec believes that these actions have no merit and
intends to defend the actions vigorously.
In July 1998, the Ontario Court of Justice (General Division) ruled that
Symantec should pay a total of approximately $6.8 million for damages and legal
costs to Triolet Systems, Inc. and Brian Duncombe in a decade-old copyright
action, for damages arising from the grant of a preliminary injunction against
the defendant. The damages were awarded following the court's ruling that
evidence presented later in the case showed the injunction was not warranted.
Symantec inherited the case through its 1995 acquisition of Delrina Corporation,
which was the plaintiff in this lawsuit. Symantec has appealed the decision.
Symantec recorded a charge of $5.8 million in June 1998, representing the
unaccrued portion of the judgment plus costs. As of September 30, 1999, the
Company believes that it has adequately accrued for both the judgment and all
legal costs.
In March 1997, a class action complaint was filed against Quarterdeck in San
Diego County Superior Court. The case was later transferred to and is currently
pending in Los Angeles County Superior Court. The complaint, purportedly on
behalf of a class of purchasers of Quarterdeck's MagnaRAM2 product, seeks
damages and injunctive relief under the Consumers Legal Remedies Act and
Business and Professions Code sections beginning with 17200 and 17500. In
November 1999, the parties resolved this case with no material financial impact
on the Company.
In October 1997, a complaint was filed in the United States District Court for
the District of Utah on behalf of PowerQuest Corporation against Quarterdeck.
The complaint alleges that Quarterdeck's partitioning software (included in
Partition-It and Partition-It Extra Strength) violates a patent held by
PowerQuest. In January 1998, PowerQuest obtained a second patent relating to
partitioning and has amended its complaint to allege infringement of that patent
as well. The plaintiff seeks an injunction against distribution of Partition-It
and Partition-It Extra Strength and monetary damages. Symantec believes this
action has no merit and intends to defend the action vigorously.
On July 30, 1998, a class action complaint was filed against Quarterdeck in the
Supreme Court of the State of New York, County of New York, on behalf of a
purported class of purchasers of Procomm Plus version 4.0 for Windows product
(Product). The complaint purported to assert claims for breach of warranty and
violation of New York's Consumer Protection From Deceptive Acts and Practices
Act arising from the Product's inability to process dates containing the year
2000. The complaint was dismissed and the court entered judgment in
Quarterdeck's favor in
11
<PAGE> 12
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
April 1999. The plaintiff has appealed the Court's decision.
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, with
respect to certain of the Company's products. While the Company believes that it
has valid defenses to these claims, the outcome of any related litigation or
negotiation could 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 affect on the financial condition of the Company, although it
is not possible to estimate the possible loss or losses from each of these
cases. Depending, however, 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 8. STOCK REPURCHASE
On March 22, 1999, the Board of Directors (the "Board") of Symantec authorized
the repurchase of up to $75 million of Symantec's outstanding common stock. As
of September 30, 1999, the Company has repurchased 1 million shares at prices
ranging from $17.90 to $19.90, for an aggregate amount of $18.7 million.
NOTE 9. ACQUISITIONS
On July 21, 1999, the Company purchased 100% of the outstanding common stock of
Unified Research Labs, Inc. for $41.5 million plus $0.6 million of acquisition
related costs. The transaction was accounted for as a purchase. Under the
transaction, Symantec recorded approximately $1.2 million for in-process
research and development, $37 million for goodwill, $5 million for capitalized
software technology and $1.6 million for other intangible assets, offset by
approximately $2.7 million in related income tax liabilities. A valuation
specialist used management's estimates to establish the amount of in-process
research and development. The goodwill and other intangibles are being amortized
over a 5-year period. For the quarter ended September 30, 1999, the Company
recorded approximately $1.2 million for goodwill amortization and approximately
$0.2 million for the amortization of other acquisition related intangible
assets.
On October 15, 1998, Symantec signed a definitive merger agreement to acquire
Quarterdeck. On November 17, 1998, the Company completed its tender offer for
the common stock of Quarterdeck acquiring an approximately 63% interest. On
March 29, 1999, Symantec acquired Quarterdeck's remaining shares through a cash
merger at the tender offer price of $0.52 per share in accordance with the
definitive merger agreement. The transaction was accounted for as a purchase.
Under the transaction, the Company recorded approximately $8 million of acquired
in-process research and development, $8 million of capitalized software
technology, $66 million of goodwill and $3 million of other intangibles. A
valuation specialist used management's estimates to establish the amount of
in-process research and development. The amounts related to workforce in place
is being amortized over 2 years. The capitalized software, goodwill and other
intangibles will be amortized over a 5-year period. In addition, Quarterdeck had
issued $25 million of 6% convertible senior subordinated notes, due in 2001, to
an institutional investor in a private placement pursuant to the terms of a Note
Agreement dated March 1, 1996. The Notes were paid in full without any premium
on March 30, 1999. For the quarter ended September 30, 1999, the Company
recorded approximately $3.9 million in amortization expense related to these
assets. For the six month period ended September 30, 1999, the Company recorded
approximately $7.7 million in amortization expense related to these assets.
12
<PAGE> 13
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On September 28, 1998, Symantec entered into an agreement whereby it purchased
Intel Corporation's anti-virus business for approximately $16.5 million.
Symantec also licensed Intel's systems management technology which it will
combine with its own anti-virus technology to create improved anti-virus
management solutions for corporate organizations. As part of the agreement,
Intel continued to support its anti-virus customers and transitioned support to
Symantec at the end of June 1999. In addition, Intel will promote Norton
Antivirus through its worldwide reseller channels. As of September 30, 1999,
Symantec has paid approximately $12 million under the agreement. The transaction
was accounted for as a purchase. Under the transaction, Symantec recorded
approximately $5.0 million for in-process research and development acquired from
Intel, $10.7 million for capitalized software technology and $0.8 million for
certain intangible assets. The assumptions and projections made have not
significantly changed during the September 1999 quarter. A valuation specialist
used management's estimates to establish the amount of in-process research and
development. The capitalized software is being amortized over a 5-year period.
For the quarters ended September 30, 1999 and 1998, the Company recorded
approximately $0.5 million and none in amortization expense related to
capitalized software and other acquired intangibles, respectively. For the six
month periods ended September 30, 1999 and 1998, the Company recorded
approximately $1 million and none in amortization expense related to capitalized
software and other acquired intangibles, respectively.
On June 24, 1998, Symantec entered into an agreement whereby Symantec purchased
the operations of Binary, an Auckland, New Zealand based company, for $27.8
million plus $0.7 million of acquisition related costs. The transaction was
accounted for as a purchase. Under the transaction, Symantec originally recorded
approximately $7.1 million for acquired in-process research and development,
$16.9 million for capitalized software technology, with the remaining $3.8
million of the purchase price allocated to goodwill, net tangible and intangible
assets. A valuation specialist used management's estimates to establish the
amount of in-process research and development. During the June 1999 quarter, the
Company reduced the purchase price and the amount allocated to goodwill by $2.3
million due to certain changes in estimates related to acquisition related
liabilities. The assumptions and projections made have not significantly changed
during the September 1999 quarter. The capitalized software, goodwill and
intangibles are being amortized over a 4-year period. For the quarters ended
September 30, 1999 and 1998, the Company incurred approximately $1.1 million and
$1.3 million, respectively, of amortization expense related to these assets. For
the six months ended September 30, 1999 and 1998, the Company incurred
approximately $2.2 million and $1.7 million, respectively, of amortization
expense related to these assets.
Effective May 18, 1998, the Company entered into a Master Agreement with IBM to
acquire rights to IBM's digital immune technology. In addition, the Company
assumed the majority of IBM's license arrangements with customers of IBM
anti-virus products. In return for the various rights acquired from IBM, the
Company agreed to pay $16 million in installments over a specified period as
well as pay royalties on revenues received from the distribution of
immune-enabled Symantec products and immune services provided by the Company
using the digital immune technology. The royalties are subject to specified
maximums and vary by time periods with ultimate termination of royalties as of a
specified date. In addition, the Company entered into a patent cross-licensing
agreement under which the parties licensed to each other their respective patent
portfolios. The transaction was accounted for as a purchase. As of September 30,
1999, Symantec paid IBM $12 million in cash with the remaining $4 million
payable in November 1999. In addition, the Company assumed liabilities of $3
million and incurred additional expenses of approximately $1 million as part of
the transaction. Under the transaction, the Company recorded approximately $7
million for in-process research and development, $12 million for goodwill and $1
million for certain prepaid research and development and other assets. A
valuation specialist used management's estimates to establish the amount of
in-process research and development. Goodwill is being amortized over 5 years.
The assumptions and projections used for this valuation have not significantly
changed during the September 1999 quarter. For the quarters ended September 30,
1999 and 1998, the Company incurred approximately $0.9 million and $0.6 million,
respectively, of amortization expense related to these assets. For the six
months ended September
13
<PAGE> 14
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
30, 1999 and 1998, the Company incurred approximately $1.8 million and $0.8
million, respectively, of amortization expense related to these assets.
PRO FORMA. The following unaudited pro forma results of operations for the three
and six month periods ended September 30, 1999 are as if the acquisition of
Quarterdeck had occurred at the beginning of each period presented. The pro
forma information has been prepared for comparative purposes only and is not
indicative of what operating results would have been if the acquisition had
taken place at the beginning of each period presented or of future operating
results.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In thousands, except per share data; unaudited) September 30, 1998 September 30, 1998
- ------------------------------------------------- ------------------- ------------------
<S> <C> <C>
Net revenues $138,886 $284,691
======== ========
Net loss $ (118) $ (2,530)
======== ========
Basic net loss per share $ (0.01) $ (0.04)
======== ========
Diluted net loss per share $ (0.01) $ (0.04)
======== ========
</TABLE>
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, which defers the adoption of SFAS No. 133 for one
year. SFAS 133 will be effective for Symantec at the beginning of the June 2001
quarter for both annual and interim reporting periods. Symantec is evaluating
the potential impact of this accounting pronouncement on its required
disclosures and accounting practices.
NOTE 11. SEGMENT INFORMATION
Symantec markets its products in North America and international countries
primarily through retail and distribution channels. Symantec's reportable
segments are significant strategic business units that offer different products
and services, distinguished by customer needs. The Company has four reportable
segments: Remote Productivity Solutions, Security and Assistance, Internet Tools
and Corporate Sunset. There are no intersegment sales. Symantec's Chief
Executive Officer and his staff evaluate performance based on profit or loss
from operations before income taxes, not including nonrecurring gains and
losses, foreign exchange gains and losses and miscellaneous other income and
expenses. Non-segment items include all general and administrative expenses and
charges that are one-time in nature, such as acquired in-process research and
development, judgment settlements and restructuring and other expenses, and are
not allocated to the business units. Assets and liabilities are not discretely
reviewed by segment and have not significantly changed since the Company's
previously filed Form 10-K for the year ended March 31, 1999.
On June 10, 1999, the Company announced its intent to establish the Internet
Tools Business Unit as a separate company. The Company continues to evaluate
alternatives including divestiture of some or all of its assets or a spin-off
into a separate company.
14
<PAGE> 15
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following tables summarize each segment's net revenues from external
customers, operating income (loss) and geographical information:
<TABLE>
<CAPTION>
Remote Security Non-
Productivity and Internet Corporate Total Segment Total
(In thousands; unaudited) Solutions Assistance Tools Sunset Segments Items Company
- ------------------------ ------------ ---------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended
September 30, 1999:
Net revenues from
external customers $ 67,434 $ 110,570 $ 4,188 $ 343 $ 182,535 $ -- $ 182,535
Operating income (loss) 27,097 30,716 (3,748) (3,268) 50,797 (18,749) 32,048
Three Months Ended
September 30, 1998:
Net revenues from
external customers 53,620 72,702 3,356 356 130,034 -- 130,034
Operating income (loss) 13,545 5,752 (5,461) 186 14,022 (22,716) (8,694)
Six Months Ended
September 30, 1999:
Net revenues from
external customers 123,615 225,535 7,943 580 357,673 -- 357,673
Operating income (loss) 41,659 67,891 (7,545) (5,853) 96,152 (36,358) 59,794
Six Months Ended
September 30, 1998:
Net revenues from
external customers 109,095 144,084 14,047 578 267,804 -- 267,804
Operating income (loss) 29,840 16,350 (3,681) (4,208) 38,301 (53,710) (15,409)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
(In thousands; unaudited) 1999 1998 1999 1998
- ------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues from external customers:
United States $100,378 $ 80,373 $200,147 $166,535
Other foreign countries 82,157 49,661 157,526 101,269
-------- -------- -------- --------
$182,535 $130,034 $357,673 $267,804
======== ======== ======== ========
</TABLE>
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS RISK FACTORS
The following discussion contains forward-looking statements that involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others things, those risk factors set forth in this
section and elsewhere in this report. We identify forward-looking statements by
words such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or similar terms that refer to the future. We cannot guarantee future results,
levels of activity, performance or achievements.
OUR EARNINGS AND STOCK PRICE ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. Due to the
factors noted below, our earnings and stock price have been and may continue to
be subject to significant volatility, particularly on a quarterly basis. There
have been previous quarters in which we have experienced shortfalls in revenue
and earnings from levels expected by securities analysts and investors, which
have had an immediate and significant adverse effect on the trading price of our
common stock. This may occur again in the future.
OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND WE WILL NEED TO
ADAPT OUR DEVELOPMENT TO THESE CHANGES. We participate in a highly dynamic
industry characterized by rapid change and uncertainty relating to new and
emerging technologies and markets. Future technology or market changes may cause
certain of our products to become obsolete more quickly than expected.
THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE AND WE EXPECT THAT
COMPETITION WILL CONTINUE AND MAY INCREASE. It is influenced by the strategic
direction of major microcomputer hardware manufacturers and operating system
providers. Our competitiveness depends on our ability to enhance existing
products and to offer successful new products on a timely basis. We have limited
resources and must restrict product development efforts to a relatively small
number of projects.
INTRODUCTION OF NEW OPERATING SYSTEMS MAY CAUSE SIGNIFICANT FLUCTUATIONS IN OUR
FINANCIAL RESULTS AND STOCK PRICE. If we are unable to successfully and timely
develop products that operate under existing or new operating systems, or if
pending or actual releases of the new operating systems delay the purchase of
our products, our future net revenues and operating results could be materially
adversely affected.
Inclusions of features by Microsoft in new versions of Windows, such as Windows
2000 and Windows 98 Second Edition, which directly compete with our products,
may decrease or delay the demand for certain of our products, including those
currently under development and products specifically intended for Windows 2000.
Our financial results and our stock price declined significantly within
approximately 6 months after the releases of Windows 3.1, Windows 95 and Windows
98, which in some cases also caused the additional requirement for hardware
upgrades, resulting in shifts in customer spending from software to hardware. We
could face adverse financial results and additional stock price declines
following future releases of widely used operating systems.
Additionally, as hardware vendors incorporate additional server-based network
management and security tools into network operating systems, the demand may
decrease for some of our products, including those currently under development.
THE TREND TOWARD CONSOLIDATION IN OUR INDUSTRY MAY IMPEDE OUR ABILITY TO COMPETE
EFFECTIVELY. As consolidation in the software industry continues, fewer
companies compete in certain markets, changing the nature of the market and
potentially providing consumers with fewer choices. Also, some of these
companies offer a broader range of products than we do, ranging from desktop to
enterprise solutions. We may not be able to compete effectively against these
competitors. Furthermore, we use strategic acquisitions, as necessary, to
acquire technology, people and products for our overall product strategy. We
completed a number of acquisitions and dispositions of technologies, companies
and products in fiscal 1999 and in the most recent fiscal quarter. We may
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
acquire and dispose of other technologies, companies and products in the future.
The trend toward consolidation in our industry may result in increased
competition in acquiring these technologies, companies or products, resulting in
increased acquisition costs or the inability to acquire the desired
technologies, companies or products. Any of these changes may have a significant
adverse effect on our future revenues and operating results.
WE MUST EFFECTIVELY ADAPT TO CHANGES IN THE DYNAMIC TECHNOLOGICAL ENVIRONMENT OF
THE INTERNET IN A TIMELY MANNER. Critical issues concerning the commercial use
of the Internet, including security, reliability, cost, ease of use,
accessibility, quality of service or potential tax or other government
regulation, remain unresolved and may affect the use of the Internet as a medium
to distribute or support our software products and the functionality of some of
our products. If we are unsuccessful in timely assimilating changes in the
Internet environment into our business operations and product development
efforts, our future net revenues and operating results could be adversely
affected.
WE FACE INTENSE PRICE-BASED COMPETITION FOR SALES OF OUR PRODUCTS. Price
competition is often intense in the microcomputer software market, especially
for utility and anti-virus products. Many of our competitors have significantly
reduced the price of utility and anti-virus products. Price competition may
continue to increase and become even more significant in the future, resulting
in reduced profit margins.
THE TRANSITION TO INTEGRATED SUITES OF UTILITIES MAY RESULT IN REDUCED REVENUES.
Symantec and our competitors now provide integrated suites of utility products.
The price of integrated utility suites is significantly less than the aggregate
price of stand-alone products that are included in these utility suites when
sold separately. As a result of the shift to integrated utility suites, price
competition is intense and we have experienced cannibalization of our
stand-alone products that are included within the suite. As a result, this may
have had an impact on our revenues and operating income from selling integrated
utility suites rather than individual products. Additionally, our products may
not compete effectively with competitors' products or integrated utility suites
introduced in the future.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. While
our diverse product line has tended to lessen fluctuations in quarterly net
revenues, these fluctuations have occurred in the past, and may occur in the
future. Fluctuations may be caused by a number of factors, including:
o the timing of announcements and releases of new or enhanced versions
of our products and product upgrades;
o the introduction of competitive products by existing or new
competitors;
o reduced demand for any given product;
o seasonality in the end-of-period buying patterns of foreign and
domestic software markets; and
o the market's transition between operating systems.
A significant proportion of our revenues are generated during the last month of
a fiscal quarter. Most resellers tend to make a majority of their purchases at
the end of a fiscal quarter. In addition, many corporate customers negotiate
site licenses near the end of each quarter. In part, this is because these two
groups are able, or believe that they are able, to negotiate lower prices and
more favorable terms. Our reliance on a large proportion of revenue occurring at
the end of the quarter and the increase in the dollar value of transactions that
occur at the end of a quarter can result in increased uncertainty relating to
quarterly revenues. Due to this end-of-period buying pattern, forecasts may not
be achieved, either because expected sales do not occur or because they occur at
lower prices or on terms that are less favorable to us. In addition, these
factors increase the chances that our results could diverge from the
expectations of investors and analysts.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
WE ARE DEPENDENT UPON THE RETAIL DISTRIBUTION CHANNEL. A large portion of our
sales are made through the retail distribution channel, which is subject to
events that create unpredictable fluctuations in consumer demand. Our retail
distribution customers also carry our competitors' products. These retail
distributors may have limited capital to invest in inventory. Their decisions to
purchase our products are partly a function of pricing, terms and special
promotions offered by us and our competitors, over which we have no control and
which we cannot predict.
Our agreements with distributors are generally nonexclusive and may be
terminated by the distributors or by us without cause. Some distributors and
resellers have experienced financial difficulties in the past. Distributors that
account for a significant portion of our sales may experience financial
difficulties in the future. When our distributors have experienced financial
difficulties in the past, we have successfully moved these inventories to other
distributors. However, we may not be able to do so in the future. If these
distributors do experience financial difficulties and we are unable to move
their inventories to other distributors, we may experience reduced sales or
increased write-offs, which would adversely affect our operating results.
CHANNEL FILL MAY AFFECT OUR NET REVENUES. During September 1999, we released
several new versions of our products. Our pattern of net revenues and earnings
may be affected by "channel fill." Distributors may fill their distribution
channels in anticipation of price increases, sales promotions or incentives.
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. As a result, distributor inventories may decrease between the date we
announce a new version or new product and the date of release. Channels may also
become filled simply because the distributors do not sell their inventories to
retail distribution or retailers to end users as anticipated. If sales to
retailers or end-users do 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.
PRODUCT RETURNS MAY AFFECT OUR NET REVENUES. Product returns can occur when we
introduce upgrades and new versions of products or when distributors or
retailers have excess inventories. Our return policy allows distributors,
subject to various limitations, to return purchased products in exchange for new
products or for credit towards future purchases. End users may return our
products through dealers and distributors within a reasonable period from the
date of purchase for a full refund. In addition, retailers may return older
versions of our products. We estimate and maintain reserves for product returns.
Future returns could, however, exceed the reserves we have established, which
could have a material adverse affect on our operating results.
WE MAY BE UNSUCCESSFUL IN UTILIZING NEW DISTRIBUTION CHANNELS. We currently
offer a broad range of products and services over the Internet. We may not be
able to effectively adapt our existing, or adopt new, methods of distributing
our software products utilizing the rapidly evolving Internet and related
technologies. The adoption of new channels may adversely impact existing
channels and/or product pricing, which may reduce our future revenues and
profitability.
OUR INCREASED SALES OF SITE LICENSES MAY INCREASE FLUCTUATIONS IN OUR FINANCIAL
RESULTS AND COULD AFFECT OUR BUSINESS. We sell corporate site licenses through
the distribution channel and through corporate resellers. We are increasingly
emphasizing sales to corporations and small businesses through volume licensing
agreements. These licensing arrangements tend to involve a longer sales cycle
than sales through other distribution channels, require greater investment of
resources in establishing the enterprise relationship and can sometimes result
in lower operating margins. The timing of the execution of volume licenses, or
their nonrenewal or renegotiation by large customers, could cause our results of
operations to vary significantly from quarter to quarter and could have a
material adverse impact on our results of operations. In addition, if the
corporate marketplace grows and becomes a larger component of the overall
marketplace, we may not be successful in expanding our corporate segment to take
advantage of this growth.
WE MAY BE UNSUCCESSFUL IN THE ENTERPRISE MARKET. We have shifted a significant
amount of resources and products for enterprise-wide applications. This market
has significantly different characteristics from the retail desktop
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
application market on which we have concentrated in the past and will require
different skills and resources to penetrate. As this area is becoming a more
significant part of our net revenues, we may experience material adverse effect
on our operating results if we are unsuccessful in capturing and maintaining a
certain level of the enterprise market.
WE DEPEND ON DISTRIBUTION BY VALUE-ADDED RESELLERS AND INDEPENDENT SOFTWARE
VENDORS FOR A SIGNIFICANT PORTION OF OUR REVENUES. We distribute some of our
products through value added resellers and independent software vendors under
arrangements through which our products are included with these resellers' and
vendors' hardware and software products and services prior to sale by them
through retail channels. If we are unsuccessful in maintaining our current
relationships and securing license agreements with additional value added
resellers and independent software vendors, or if these resellers and vendors
are unsuccessful in selling their products and services, our future net revenues
and operating results may be adversely affected.
WE MAY EXPERIENCE DIFFICULTY INTEGRATING ACQUISITIONS. In July 1999, we
completed the acquisition of URLabs, Inc. We also completed a number of
acquisitions in fiscal 1999 and may acquire other companies and technology in
the future. We may encounter difficulties in integrating the operations and
employees of, and realizing certain economies of scale from, past and future
acquisitions. In addition, we may need to secure financing to pay for future
acquisitions. Acquisition financing may not be available on favorable terms or
at all. We typically incur significant expenses in connection with our
acquisitions. Future acquisitions may have a significant adverse impact on our
future profitability and financial resources.
WE FACE RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS. A significant portion of
our revenues, manufacturing costs and operating expenses result from
transactions outside of the United States, often in foreign currencies. As a
result, our operating results may be materially and adversely affected by
fluctuations in currency exchange rates and general uncertainty with each
country's political and economic structure.
INCREASED UTILIZATION AND COSTS OF OUR TECHNICAL SUPPORT SERVICES MAY ADVERSELY
AFFECT OUR FINANCIAL RESULTS. Like many companies in the software industry,
technical support costs comprise a significant portion of our operating costs
and expenses. Over the short term, we may be unable to respond to fluctuations
in customer demand for support services. We also may be unable to modify the
format of our support services to compete with changes in support services
provided by competitors.
THE RESULTS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE UNCERTAIN. We believe
that we will need to make significant research and development expenditures to
remain competitive. While we perform extensive usability and beta testing of new
products, the products we are currently developing or may develop in the future
may not be technologically successful. If they are not technologically
successful, our resulting products may not achieve market acceptance and our
products may not compete effectively with products of our competitors currently
in the market or introduced in the future.
THE LENGTH OF THE PRODUCT DEVELOPMENT CYCLE IS DIFFICULT TO PREDICT. The length
of our product development cycle has generally been greater than we originally
expected. We are likely to experience delays in future product development.
These delays could have a material adverse affect on the amount and timing of
future revenues.
WE MUST MANAGE AND RESTRUCTURE OUR EXPANDING OPERATIONS EFFECTIVELY. We
continually evaluate our product and corporate strategy. We have recently
undertaken and will in the future undertake organizational changes and/or
product and marketing strategy modifications. As a result of these changes, we
have experienced changes in the senior management of our principal business
units. 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, these efforts
may not be successful and we may not realize any benefit from these efforts.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
WE MUST ATTRACT AND RETAIN PERSONNEL WHILE COMPETITION FOR PERSONNEL IN OUR
INDUSTRY IS INTENSE. We believe that our future success will depend in part on
our ability to recruit and retain highly skilled management, marketing and
technical personnel, particularly as we focus on enterprise-wide applications.
Competition in recruiting personnel in the software industry is intense. To
accomplish this, we believe that we must provide personnel with a competitive
compensation package, including stock options, which requires ongoing
stockholder approval.
WE DEPEND ON OUR INTERNAL COMMUNICATIONS SYSTEMS THAT MAY BE DISRUPTED. Our
order entry and product shipping centers are geographically dispersed. If our
communications between these centers are disrupted, particularly at the end of a
fiscal quarter, we will suffer an unexpected shortfall in net revenues and a
resulting adverse impact on our operating results. Communications and Internet
connectivity disruptions may also cause delays in customer access to our
Internet-based services or product sales. A business disruption could occur as a
result of natural disasters or the interruption in service by communications
carriers and may cause delays in product development that could adversely impact
our future net revenues.
OUR SOFTWARE PRODUCTS AND WEB SITE MAY BE SUBJECT TO INTENTIONAL DISRUPTION. We
may in the future be the target of software viruses specifically designed to
impede the performance of our products. Such viruses could be created and
deployed against our products in the future. Similarly, experienced computer
programmers, or hackers, may attempt to penetrate our network security or the
security of our web site from time to time. A hacker who penetrates our network
or web site could misappropriate proprietary information or cause interruptions
of our services. We might be required to expend significant capital and other
resources to protect against, or to alleviate, problems caused by virus creators
and hackers.
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. We regard our software
as proprietary and underlying technology as proprietary. We seek to protect our
proprietary rights through a combination of confidentiality agreements and
copyright, patent, trademark and trade secret laws. However, we do not employ
technology to prevent copying of our products. Third parties may copy aspects of
our products or otherwise obtain and use our proprietary information without
authorization or develop similar technology independently. All of our products
are protected by copyright and we have a number of patents and patent
applications pending. We may not achieve the desired protection from, and third
parties may design around, our patents. In addition, existing copyright laws
afford limited practical protection. Furthermore, the laws of some foreign
countries do not offer the same level of protection of our proprietary rights as
the laws of the United States. Any legal action that we may bring to protect
proprietary information could be expensive and may distract management from
day-to-day operations.
WE ARE INVOLVED IN LITIGATION WHICH COULD, AND ANY FUTURE LITIGATION MAY, AFFECT
OUR FINANCIAL RESULTS. From time to time, we may be subject to claims that we
have infringed the intellectual property rights of others, that our products are
not Year 2000 compliant or other product liability claims, or other claims
incidental to our business. We are currently involved in a number of judicial
and administrative proceedings incidental to our business. For a discussion of
our current litigation, see Note 7 of Notes to Condensed Consolidated Financial
Statements in this Form 10-Q. We intend to defend and/or pursue all of these
lawsuits vigorously. We may suffer an unfavorable outcome in one or more of
these cases. We do not expect the final resolution of these lawsuits to have a
material adverse effect on our financial position, individually or in the
aggregate. However, depending on the amount and timing of unfavorable
resolutions of these lawsuits, our future results of operations or cash flows
could be materially adversely affected in a particular period.
INTELLECTUAL PROPERTY LITIGATION
We have been involved in disputes claiming patent infringement in the past and
are currently involved in a number of patent disputes and litigation. Although
infringement claims may ultimately prove to be without merit, they are expensive
to defend and may consume our resources or divert our attention from day-to-day
operations. If a third party alleges that we have infringed their intellectual
property rights, we may choose to litigate the claim and/or seek an appropriate
license from the third party. If we engage in litigation and the third party is
found to have a
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
valid patent claim against us and a license is not available on reasonable
terms, our business, operating results and financial condition may be materially
adversely affected.
YEAR 2000 - PRODUCT LIABILITY LITIGATION
We believe the software products that we currently develop and actively market
are Year 2000 compliant for significantly all functionality. However, these
products could contain errors or defects related to the Year 2000. In addition,
earlier versions of our products, those that are not the most currently released
or are not currently being developed, may not be Year 2000 compliant. We have
sold some of our older products, which are not being actively developed and
updated. These older products are also not necessarily Year 2000 compliant and
are no longer sold by us.
SOFTWARE DEFECTS AND PRODUCT LIABILITY
Software products frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. We have not
experienced any material adverse effects resulting from any of these defects or
errors to date and we test our products prior to release. Nonetheless, defects
and errors could be found in current versions of our products, future upgrades
to current products or newly developed and released products. Software defects
could result in delays in market acceptance or unexpected reprogramming costs,
which could materially adversely affect our operating results. Most of our
license agreements with customers contain provisions designed to limit our
exposure to potential product liability claims. It is possible, however, that
these provisions limiting our liability may not be valid as a result of federal,
state, local or foreign laws or ordinances or unfavorable judicial decisions. A
successful product liability claim could have a material adverse affect on
Symantec's business, operating results and financial condition.
THE CONVERSION OF THE EUROPEAN CURRENCIES TO THE EURO MAY IMPACT OUR FOREIGN
EXCHANGE HEDGING PROGRAM. On January 1, 1999, the euro became the common
currency of 11 of the 15 member countries of the European Union. The national
currencies of these 11 countries will coexist with the euro at fixed exchange
rates through December 31, 2001. Euro denominated bills and coins will be
introduced on January 1, 2002 and, by July 1, 2002, the national currencies will
no longer be legal tender. We expect that the euro will dictate changes in our
foreign exchange hedging program. These changes may lead to increased
fluctuations in foreign currency hedging results. Based on current information,
we do not believe that the euro will have a material adverse impact on our
operations or financial condition.
WE MAY EXPERIENCE REDUCED DEMAND FOR OUR PRODUCTS DUE TO CHANGES IN CUSTOMER
BEHAVIOR RESULTING FROM YEAR 2000 PREPARATION. With the increasing requirements
on Year 2000 compliance and functionality, many enterprise customers are using
their Information Technology budgets in 1999 to focus on Year 2000 issues. In
addition, our customer's Information Technology organizations may be unwilling
to deploy new software until after the Year 2000 in order to reduce the
complexity of any changes in their systems required by any actual Year 2000
failures. Either of these factors could reduce sales of our products and could
have an adverse affect on our net revenues. In addition, we may experience
significantly reduced revenues from our Norton 2000 product sales as demand may
significantly decline and could adversely affect our future operating results.
WE MAY EXPERIENCE DISRUPTION OF OUR INTERNAL SYSTEMS AS A RESULT OF THE YEAR
2000. We have completed a major evaluation of our internal applications, systems
and databases. We are modifying or replacing portions of our hardware and
associated software to enable our operational systems and networks to function
properly with respect to dates leading up to January 1, 2000, and thereafter. We
continue to evaluate interfaces between our systems and third-party systems,
such as those of key suppliers, distributors and financial institutions, for
Year 2000 functionality. In addition, the systems of other companies with which
we do business may not address Year 2000 problems on a timely basis. Based on
this, we expect the process of evaluating third-party Year 2000 compliance to be
an ongoing process. We are evaluating Year 2000 exposures of our key suppliers,
as well as our buildings and related facilities.
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Our Year 2000 Project is divided into several phases:
Assessment - where the vulnerability of the hardware, software, process or
service element is identified
Planning - where corrective action is determined for each vulnerable element
Remediation and Unit Test - where the corrective action is taken and initial
testing is performed
Limited System Test - where related elements are tested together, using dates
in the vulnerable range and any necessary follow-up remediation is completed
We track the progress of the Year 2000 on a sub-project level. The following
table is a summary of the completion status and currently expected completion
dates of each phase for each sub-project. The expected completion dates are
subject to the risks and uncertainties of locating and correcting errors in
complex computer systems. The actual dates on which we complete each phase may
vary significantly. Our principal software vendor will be providing delayed Year
2000 patches throughout 1999. These patches need to be tested before installing
them into our environment. In order to optimize the usage of our special test
environment and people resources, we have conservatively extended our Limited
Systems Test phase. Again, we realized that some of our primary hardware vendors
would continue to supply delayed Year 2000 fixes through 1999 and therefore we
will need to prepare accordingly. Building and related facilities dates were
modified to address the resources involved in the physical move of our World
Headquarters in the latter half of 1999. Our Japan and Asia Pacific sites are
still in the process of remediation and testing so date modifications have been
reflected accordingly. We believe that these conservative date modifications
will not impair our ability to remain in business before, throughout and beyond
the transition into the new millennium. Periodic updates regarding the Year 2000
status are provided to both the Executive Staff and Board of Directors. We
expect that the costs to complete the Year 2000 project to be approximately $2
million and will be expensed as incurred.
<TABLE>
<CAPTION>
SUB-PROJECT PHASE AND STATUS OR DUE DATE
- ----------- --------------------------------------------------------
Limited
Assessment Planning Remediation System Test
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Business Systems Complete Complete Complete Jul-Dec 1999
Networks, Servers & Communications
Americas Complete Complete Complete Jul-Dec 1999
EMEA Complete Complete Complete Oct-Dec 1999
Japan & Asia/Pacific Complete Complete Nov 1999 Nov-Dec 1999
Desktop and Mobile Computers
Americas Complete Complete Complete Jul-Dec 1999
EMEA Complete Complete Complete Jul-Dec 1999
Japan & Asia/Pacific Complete Complete Nov 1999 Nov-Dec 1999
Buildings and Related Facilities Complete Complete Complete Jul-Dec 1999
Suppliers and Outside Services Complete Complete Complete Oct-Dec 1999
</TABLE>
If our electric power or telephone services are interrupted for significant
periods, some of our facilities might be unable to operate. Symantec is taking
necessary steps to backup its critical sites to help alleviate any problems
associated with power and/or telephone outages. We maintain business recovery
plans for our major locations to provide for an orderly response to various
disaster scenarios. We are reviewing and augmenting these plans to provide
contingency plans for potential internal and external Year 2000 related
problems. We have completed this analysis and are currently finalizing the
associated contingency plans. These contingency plans along with Symantec's
business recovery plans are currently being rehearsed and rehearsals should be
complete by mid December 1999.
22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
We believe that, following our conversion to new software and modifications of
existing computer hardware and software, we will not suffer significant
operational problems with our computer systems due to the Year 2000. However,
because testing of the Year 2000 functionality of our systems must occur in a
simulated environment, we are unable to test fully all Year 2000 interfaces and
capabilities prior to the Year 2000. If we are unexpectedly unable to complete
remaining modifications and conversions in a timely manner, Year 2000
noncompliance might materially adversely impact our operations.
We have not deferred any other information systems projects as a result of our
focus on Year 2000 compliance issues. We believe that our exposure from Year
2000 issues is not material to our business as a whole. However, if certain key
suppliers or distributors should suffer extended business interruptions due to
Year 2000 problems, we could be forced to delay product shipments.
23
<PAGE> 24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
OVERVIEW
Symantec is a world leader in Internet security technology that provides content
security solutions to enterprise organizations. Symantec is also a leading
provider of software products for the consumer market. Our products and
solutions make users productive and keep their computers safe and reliable,
anywhere and anytime. Symantec has a 52/53-week fiscal accounting year. The
September 30, 1999 and 1998 quarters closed on October 1, 1999 and October 2,
1998, respectively, and each comprised 13 weeks of revenue and expense activity.
Each of the six month periods ended September 30, 1999 and 1998, comprised of 26
weeks of revenue and expense activity.
RESULTS OF OPERATIONS
During the September 1999 quarter, we acquired Unified Research Labs, Inc.
(URLabs). During the December 1998 quarter, we completed our tender offer for
63% interest in Quarterdeck Corporation (Quarterdeck). In the March 1999
quarter, we acquired the remaining 37% interest in Quarterdeck. During the
September 1998 quarter, we acquired Intel Corporation's (Intel) anti-virus
business. During the June 1998 quarter, we acquired International Business
Machine's (IBM) anti-virus business and Binary Research Limited's (Binary)
operations (See Note 9 of Notes to Condensed Consolidated Financial Statements
in this Form 10-Q.) The results of operations from these acquisitions have been
included in our results of operations from their respective dates of
acquisition.
24
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
The following table sets forth each item from our consolidated statements of
income 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 Six Months
Ended Percent Ended Percent
September 30, Change September 30, Change
---------------- in Dollar --------------- in Dollar
1999 1998 Amounts 1999 1998 Amounts
---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
Net revenues 100% 100% 40% 100% 100% 34%
Cost of revenues 17 16 44 17 15 47
--- --- ---- ----
Gross margin 83 84 40 83 85 31
Operating expenses:
Research and development 15 20 6 15 19 8
Sales and marketing 42 54 8 42 52 6
General and administrative 5 8 (1) 5 7 (3)
Amortization of goodwill 3 1 525 3 1 726
Amortization of intangibles from acquisitions -- -- * -- -- *
Acquired in-process research and development 1 4 (76) -- 7 (94)
Restructuring and other expenses -- 4 (99) 1 2 (45)
Litigation judgment -- -- -- -- 2 *
--- --- ---- ----
Total operating expenses 66 91 2 66 90 (2)
--- --- ---- ----
Operating income (loss) 17 (7) (469) 17 (5) (488)
Interest income 1 2 (38) 1 3 (44)
Interest expense -- -- * -- -- *
Income, net of expense, from sale of technologies
and product lines 3 8 (50) 3 9 (61)
Other (expense) income, net -- -- (24) -- 1 (90)
--- --- ---- ----
Income before income taxes 21 3 773 21 8 276
Provision for income taxes 7 2 424 7 4 143
--- --- ---- ----
Net income 14% 1% 1,228 14% 4% 418
=== === ==== ====
</TABLE>
* percentage change is not meaningful.
NET REVENUES
Net revenues increased 40% to $183 million in the September 1999 quarter from
$130 million in the September 1998 quarter. The increase in total revenues was
due to strong growth in our three principal business units, Security and
Assistance, Remote Productivity Solutions and Internet Tools, with the largest
increase in both dollars and percentage in our Security and Assistance business
unit due to strong growth in the anti-virus market, fuelled by several new
product version releases and an increase in our corporate sales.
Net revenues increased 34% to $358 million in the six month period ended
September 30, 1999 from $268 million in the comparable period ended September
30, 1998. The increase in total revenue was also due to strong growth in our
Security and Assistance and Remote Productivity Solutions business units due to
increased demand for anti-virus products and significant growth in our corporate
sales.
25
<PAGE> 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
BUSINESS UNITS
The Security and Assistance business unit is dedicated to being the leader in
Internet security technology and being indispensable to customers' daily use of
computers by increasing productivity and keeping computers safe and reliable.
The Security and Assistance business unit comprised approximately 61% and 56% of
net revenues in the quarters ended September 30, 1999 and 1998, respectively.
The Security and Assistance business unit comprised approximately 63% and 54% of
net revenues in the six month periods ended September 30, 1999 and 1998,
respectively. Increased net revenues for this business unit in both the three
and six month periods ended September 30, 1999, compared to the three and six
month periods ended September 30, 1998, were primarily related to outbreaks of
significant viruses, resulting in an increase in sales of Norton AntiVirus and
Norton SystemWorks. In addition, the Norton Ghost product (disk-cloning
technology), acquired as part of the Binary agreement in fiscal 1999, and Norton
2000, have shown significant growth, partially offset by decreases in sales of
Norton Utilities and MAC products.
The Remote Productivity Solutions business unit helps remote professionals
remain productive and work reliably, anywhere and anytime. The Remote
Productivity Solutions business unit comprised approximately 37% and 41% of net
revenues for the quarters ended September 30, 1999 and 1998, respectively. The
Remote Productivity Solutions business unit comprised approximately 35% and 41%
of net revenues for the six months ended September 30, 1999 and 1998,
respectively. Although revenues decreased as a percentage of total revenues,
absolute dollar revenue for this business unit increased 20% and 13% for the
three and six month periods as compared to their same periods in the prior year,
respectively. The increase in sales is primarily related to significant growth
in sales of pcANYWHERE, as a new release was introduced in June 1999, partially
offset by decreased sales in ACT! and the Winfax products.
Internet Tools, which primarily are products providing an easy to use Java
development environment, comprised approximately 2% and 3% of net revenues in
the quarters ended September 30, 1999 and 1998, respectively, and 2% and 5% for
the six month periods ended September 30, 1999 and 1998, respectively. Although
the net revenues decreased as a percentage of revenue, net revenues increased in
absolute dollars by 12% for the quarter ended September 30, 1999 compared to the
quarter ended September 30, 1998. This business unit's net revenues were lower
in the six month period ended September 30, 1999 than in the six month period
ended September 30, 1998, primarily due to a $6 million license contract with a
single customer, which occurred in the June 1998 quarter.
INTERNATIONAL
Net revenues from international sales outside of North America were $75 million
and $45 million and represented 41% and 36% of total net revenues in the
quarters ended September 30, 1999 and 1998, respectively. Net revenues from
international sales outside of North America were $143 million and $93 million
and represented 40% and 35% of total net revenues in the six month periods ended
September 30, 1999 and 1998, respectively. These increases in net revenues were
the result of strong sales growth in Europe, Middle East and Africa (EMEA),
Japan and the Asia/Pacific regions. The EMEA, Japan and Asia/Pacific regions had
growth in net revenues of 52%, 64% and 92%, respectively, for the quarter ended
September 30, 1999 compared to the quarter ended September 30, 1998, with
increases in revenues of 50%, 53%, 90%, respectively, for the six month period
ended September 30, 1999 compared to the comparable periods ended September 30,
1998. These increases in revenues were driven primarily by growth in sales of
pcANYWHERE and Norton AntiVirus products.
GROSS MARGIN
Gross margin represents net revenues less cost of revenues. Cost of revenues
consists primarily of manufacturing expenses, costs for producing manuals,
packaging costs, royalties paid to third parties under publishing contracts and
amortization and write-off of capitalized software and purchased product rights
and technologies, including those acquired in business combinations.
26
<PAGE> 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Gross margin decreased slightly to 83% of net revenues in the September 1999
quarter from 84% in the September 1998 quarter. Gross margin decreased to 83%
for the six month period ended September 30, 1999 from 85% for the six month
period ended September 30, 1998. Factors contributing to the decrease in gross
margin percentage include a change in product mix and increased price
competition. Gross margin was also adversely impacted by increased royalty
expense from products sold with higher royalty rates than those sold in the
quarter and six months ended September 1998, primarily from increased sales of
the Norton 2000 product. In addition, technical support costs related to
corporate sales increased as the mix of corporate sales increased. These
increases in cost of sales were partially offset by certain packaging cost
reductions.
During the September 1999 quarter, we capitalized approximately $6.6 million of
software technology as part of our acquisition of URLabs. During the September
1998 quarter, we capitalized $10.7 million of software technology acquired as
part of our acquisition of Intel's anti-virus business. During the June 1998
quarter, we capitalized $16.9 million of software technology acquired as part of
our acquisition of certain assets of Binary. Amortization of capitalized
software, including amortization and write-off of both purchased product rights,
technologies and capitalized software development costs totaled approximately $2
and $1 million for the September 1999 and 1998 quarters, respectively, and
approximately $4 and $1 million for the six month periods ended September 30,
1999 and 1998, respectively. Prior to consideration of any future fiscal 2000
acquisitions, we expect to expense approximately $2.3 million of capitalized
software amortization per quarter for the next 11 quarters, decreasing over each
of the remaining 9 quarters.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were 15% and 20% of net revenues for the three
months ended September 30, 1999 and 1998, respectively, and 15% and 19% of net
revenues in the six months ended September 30, 1999 and 1998, respectively. The
decrease as a percentage of net revenues resulted primarily from the increases
in net revenues in the most recent periods.
Although as a percentage of net revenues research and development expenses
decreased, absolute dollars increased 6% to $27 million in the September 1999
quarter from $26 million in the September 1998 quarter. Absolute dollars
increased 8% to $55 million in the six months ended September 1999 from $51
million in the comparable September 1998 period. The increases in both the three
and six month periods were primarily due to increases in employee related
expenses during the September 1999 quarter. We also incurred additional costs
related to legal expenses for product claims in the September 1998 quarter.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were 42% and 54% of net revenues for the three
months ended September 30, 1999 and 1998, respectively, and 42% and 52% of net
revenues for the six month periods ended September 30, 1999 and 1998,
respectively. The decrease as a percentage of net revenues resulted primarily
from the increases in net revenues in the most recent periods.
Sales and marketing expenses increased 8% from $71 million in the September 1998
quarter to $76 million in the September 1999 quarter. Sales and marketing
expenses increased 6% to $149 million in the six month period ended September
1999 from $140 million in the six month period ended September 1998. The
increases in sales and marketing expenses for both the three and six month
periods were due primarily to growth in overall head count, salaries and
commissions, offset by a reduction in consulting services related to certain
marketing and promotional activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 5% and 8% of net revenues in the three
month periods ended September 1999 and 1998, respectively, and 5% and 7% of net
revenues in the six month periods ended September 1999 and 1998, respectively.
27
<PAGE> 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
General and Administrative expenses decreased 1% and remained at approximately
$10 million for both three month periods ended September 1999 and 1998. General
and administrative expenses decreased 3% and totaled approximately $19 million
in both the September 1999 and 1998 six month periods.
AMORTIZATION OF GOODWILL AND INTANGIBLES FROM ACQUISITIONS
Amortization of goodwill and intangibles from acquisitions increased
approximately $5 million from $0.8 million in the September 1998 quarter to $5.4
million in the September 1999 quarter. Amortization of goodwill and intangibles
from acquisitions increased approximately $8 million from $1.1 million for the
six month period ended September 30, 1998 to $9.5 million in the six month
period ended September 30, 1999. The increases in both three and six month
periods were due to capitalization of additional goodwill and other intangibles
from the acquisitions we made during fiscal 1999 and the URLabs acquisition we
completed in the September 1999 quarter. Prior to consideration of any future
fiscal 2000 acquisitions, we expect continued amortization of goodwill and other
intangibles related to these acquisitions to be approximately $5.8 million over
the following 11 quarters reducing over each of the remaining 9 quarters (see
Note 9 of Notes to Condensed Consolidated Financial Statements in this Form
10-Q.)
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES
Acquired in-process research and development expenses were approximately $1.2
million in the three and six month periods ended September 30, 1999, in
connection with our acquisition of URLabs. Acquired in-process research and
development expenses were approximately $5 million in the three month period
ended September 30, 1998 in connection with our acquisition of Intel's
anti-virus business. In the June 1998 quarter, we recognized acquired in-process
research and development expenses of $7.1 million in connection with our
acquisition of certain assets and technologies of IBM, and a similar amount in
connection with our acquisition of the assets and technologies of Binary (see
Note 9 of Notes to Condensed Consolidated Financial Statements in this Form
10-Q.) The assumptions and projections made in relation to these fiscal 1999
acquisitions have not significantly changed.
The in-process technology acquired in the URLabs acquisition primarily consisted
of research and development related to the next generation of URLab's two main
products, I-Gear 3.5 and Mail Gear 1.2, which are both scheduled to be released
in the fourth quarter of calendar 1999. The I-Gear product line and Mail Gear
product lines are designed for content management use in URL filtering and
E-mail filtering, respectively. URLab's research and development was focused on
providing more robust features in its development of the next generation
products of I-Gear 3.5 and Mail Gear 1.2.
We determined the fair value of the in-process technology for each of the
acquisitions by estimating the projected cash flows related to these projects,
including the cost to complete the in-process technologies and future revenues
to be earned upon commercialization of the products. We then discounted the
resulting cash flows back to their net present values and based the net cash
flows from such projects on our analysis of the respective markets and estimates
of revenues and operating profits related to these projects.
We assumed that revenue attributable to URLab's in-process technology will be
approximately $4 million in the first year and increase in the second and third
years of the 5-year projection period at annual rates of 77% and 40%,
respectively, and then decrease at rates of 2% and 38% over the remaining two
periods. We projected annual revenues to range from approximately $4 million to
$11 million over the projected period. These projections were based on:
o aggregate growth rates for the business as a whole;
o individual product revenues;
o anticipated product development cycles; and
o the life of the underlying technology.
28
<PAGE> 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
We estimated selling, general and administrative expenses for the in-process
technology to be approximately 69%, as a percentage of revenue in the first
year, reducing to approximately 50% in each of the remaining 4 years of the
5-year projection period.
We projected operating profit before acquisition related amortization charges to
increase from less than $1 million during the first year to approximately $2.5
million during the third year. We projected that operating profits would then
decrease from 7% to 35% during the remaining two years, resulting in profits of
approximately $2.4 million and $1.5 million, respectively. Because we assumed
that most product development costs would be incurred in the first year,
reducing operating expenses as a percentage of revenue in later years, we
anticipate operating profit to increase faster than revenue in the early years.
We estimated costs to be incurred to reach technological feasibility of the
in-process technologies from URLabs as of the date of the acquisition to total
approximately $0.2 million. We estimated the in-process technology to be between
30%-40% complete at that time. We project the introduction of acquired
in-process technologies in the marketplace during calendar year 2000, although
we cannot be sure that the introduction will be made as scheduled.
A discount rate of 30% was used for valuing the in-process technologies from
URLabs, which we believe reflects the risk associated with the completion of
these research and development projects and the estimated future economic
benefits to be generated subsequent to their completion. This discount rate is
higher than our weighted average cost of capital of 25%, due to the fact that
the technology had not reached technological feasibility as of the date of the
valuation.
The assumptions and projections discussed for the technologies acquired from
URLabs were made based on information available at the time and should not be
taken as indications of actual results, which could vary materially based on the
risks and uncertainties identified in the risk factors set forth in this Form
10-Q.
The nature of the efforts required to develop the acquired in-process technology
principally relate to the completion of all planning, designing, development and
testing activities that are necessary to establish that the product or service
can be produced to meet its design specifications including features, functions
and performance. We expect the acquired in-process technology to be developed
into commercially feasible products. However, there are no assurances that this
will occur. Failure to complete these products in their entirety, or in a timely
manner, could have a material adverse impact on our operating results, financial
condition and results of operations. Additionally, the value of the other
intangible assets may become impaired.
29
<PAGE> 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESTRUCTURING AND OTHER EXPENSES
Restructuring and other expenses consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
(In thousands; unaudited) 1999 1998 1999 1998
- -------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Personnel severance $ 40 $3,800 $2,813 $3,800
Planned abandonment of manufacturing
facility lease -- 1,305 -- 1,305
------ ------ ------ ------
Total restructuring and other expenses $ 40 $5,105 $2,813 $5,105
====== ====== ====== ======
</TABLE>
In the quarter ended June 1999, we provided for certain costs of approximately
$2.4 million related to an agreement reached with our former CEO, and other
restructuring costs associated with certain of our regions.
During the quarter ended September 30, 1998, we made a decision to restructure
our operations and outsource our domestic manufacturing operations. As a result,
we recorded a $3.8 million charge for personnel severance to reduce the
workforce by approximately 5% in both domestic and international operations and
a $1.3 million charge for the planned abandonment of a manufacturing facility
lease. As of September 30, 1999, approximately $4.5 million of these charges had
been incurred, and the remaining $0.6 million was no longer considered
necessary. As a result, we reduced the personnel severance accrual by $0.6
million. Also during the quarter ended September 30, 1999, we provided severance
of approximately $0.7 million for certain of our employees due to the
realignment of our business units. As a result of these events in the September
1999 quarter, the net charge to personnel severance was approximately $40,000.
LITIGATION JUDGMENT
Litigation judgment expenses totaled $5.8 million in the June 1998 quarter.
These expenses related to a judgment by a Canadian court on a decade-old
copyright action assumed by us when we acquired Delrina Corporation (see Note 7
of Notes to Condensed Consolidated Financial Statements in this Form 10-Q.)
INTEREST INCOME AND INTEREST EXPENSE
Interest income was approximately $2 million and $4 million in the three months
ended September 30, 1999 and 1998, respectively. Interest income decreased 38%
in the quarter ended September 30, 1999, over the quarter ended September 30,
1998. Interest income was approximately $5 million and $8 million in the six
month periods ended September 30, 1999 and 1998, respectively. Interest income
decreased 44% in the six month period ended September 30, 1999, over the six
month period ended September 30, 1998. Decreases in both the three and six month
periods in September 1999 over September 1998 were primarily due to higher
average invested cash balances and realized gains on the sale of investments in
the three and six month periods ended September 1998.
Interest expense was $0.3 million in the three month period ended September 30,
1998. Interest expense was $0.7 million in the six month period ended September
30, 1998. There was minimal interest expense in the three and six month periods
ended September 30, 1999. The decreases in interest expense in both the three
and six month periods were primarily due to conversion of our convertible
subordinated debentures at the end of fiscal 1999.
30
<PAGE> 31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
INCOME, NET OF EXPENSE, FROM SALE OF TECHNOLOGIES AND PRODUCT LINES
Income, net of expense, from sale of technologies and product lines decreased
from $10 million in the three month period ended September 30, 1998 to $5
million in the three month period ended September 30, 1999. Income, net of
expense, from sale of technologies and product lines decreased from $25 million
to $10 million in the six month periods ended September 30, 1999 and 1998,
respectively. These relate to royalties from our sale of certain software
products, technologies and tangible assets to JetForm Corporation (JetForm) and
the Hewlett-Packard Company (HP) during fiscal 1997. Payments from JetForm and
HP were lower in the quarter and six months ended September 30, 1999, compared
to the same periods ended September 30, 1998, as the HP payments ended in the
December 1998 quarter and the payments from JetForm have declined in accordance
with the payment terms.
OTHER (EXPENSE) INCOME, NET
Other (expense) income, net remained flat at less than $1 million for the
quarters ended September 30, 1999 and 1998. Other (expense) income, net
decreased from $2 million for the six months ended September 30, 1998 to $0.2
million for the six month period ended September 30, 1999. Other (expense)
income decreased primarily due to a foreign exchange gain realized as a result
of the paydown of an intercompany loan and other foreign currency exchange gains
(losses) from fluctuations in currency exchange rates in the June 1998 quarter.
INCOME TAX PROVISION
Excluding the impact of acquired in-process research and development charges,
the effective tax rate on income before income taxes was 33% for the three and
six months ended September 30, 1999, and 32% for the three and six months ended
September 30, 1998. These rates are lower than the U.S. federal statutory tax
rate primarily due to a lower statutory tax rate on our Irish operations.
The tax provision for the six months ended September 1999 consists of two items:
a $25.5 million (or 33% effective tax rate) provision on income before income
taxes, restructuring charges and acquired in-process research and development
charges of $78.6 million, and a $0.5 million tax benefit on the $4.0 million of
restructuring charges and acquired in-process research and development charges.
The tax benefit on the restructuring charges and acquired in-process research
and development charges is less than the U.S. federal statutory tax rate due to
certain non-deductible acquired in-process research and development charges and
certain non-deductible restructuring charges.
Similarly, the tax provision for the six months ended September 1998 consists of
a 32% tax rate applied to income from ongoing operations and a $2.2 million tax
benefit on the $19.1 million charge for acquired in-process research and
development. A valuation allowance was established for the portion of the
deferred tax asset attributable to the acquired in-process research and
development that is not expected to be realized within five years.
LIQUIDITY AND CAPITAL RESOURCES
Cash, short-term investments and long-term investments increased $13 million to
$210 million at September 30, 1999 from $197 million at March 31, 1999. This
increase is largely due to cash provided from operating activities and net
proceeds from the exercise of stock options under the Stock Option Plans and the
sales of common stock under the Employee Stock Purchase Plan, offset by cash
paid to the remaining Quarterdeck shareholders to complete the acquisition of
Quarterdeck, capital expenditures, repurchases of our common stock, and the
acquisition of URLabs.
In addition to cash and short-term investments, we have $79 million of
restricted investments related to collateral requirements under certain lease
agreements. Subsequent to the transfer of one of our World Headquarters office
buildings and the move to a new office building, we are now obligated under
these lease agreements for two office
31
<PAGE> 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
buildings in Cupertino, California, to maintain a restricted cash balance
invested in U.S. Treasury securities with maturities not to exceed three years.
In accordance with the lease terms, these funds are not available to meet our
operating cash requirements. In addition, we are obligated to comply with
certain financial covenants. Future acquisitions may cause us to be in violation
of these financial covenants.
As of September 23, 1999, we amended our $10 million line of credit which
expires in May 2000, amending certain financial covenants as a result of our
acquisition of URLabs. We were in compliance with the debt covenants for this
line of credit as of September 30, 1999. As of September 30, 1999, there were no
borrowings and less than $1 million of standby letters of credit outstanding
under this line. Future acquisitions may cause us to be in violation of the line
of credit covenants. However, we believe that if the line of credit is canceled
or amounts are not available under the line, there would not be a material
adverse impact on our financial results, liquidity or capital resources.
Net cash provided by operating activities was $90 million and was comprised of
net income of $50 million, non-cash related expenses of $27 million and a net
change in net assets and liabilities of $13 million.
Net trade accounts receivable increased $6 million to $82 million at September
30, 1999, from $76 million at March 31, 1999, primarily due to an increase in
revenues in September 1999 compared to March 1999 in most of our regions.
On March 22, 1999, the Board authorized the repurchase of up to $75 million of
our outstanding common stock. As of September 30, 1999, we have purchased 1
million shares at prices ranging from $17.90 to $19.90, for an aggregate amount
of $18.7 million.
On June 9, 1998, the Board authorized the repurchase of up to 5% of our
outstanding common stock before December 31, 1998. No shares were repurchased
under this plan during the June 1998 quarter. During the September 1998 quarter,
we purchased 1.7 million shares at prices ranging from $17.13 to $27.21 for an
aggregate amount of approximately $40 million. We completed the repurchase as of
October 30, 1998, repurchasing a total of 2.9 million shares at prices ranging
from $13.10-$27.21 for an aggregate amount of approximately $56 million.
If we were to sustain significant losses, we could be required to reduce
operating expenses, which could result in product delays and a reassessment of
acquisition opportunities, which could negatively impact our growth objectives
and/or pursuit of further financing options. We believe existing cash and
short-term investments and cash generated from operating activities will be
sufficient to fund operations for the next year.
32
<PAGE> 33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have significant exposure to changing interest rates because of the
low levels of marketable securities with maturities more than 90 days on our
balance sheet. We do not undertake any specific actions to cover our exposure to
interest rate risk and we are not a party to any interest rate risk management
transactions. We do not purchase or hold any derivative financial instruments
for trading purposes.
We conduct business in 31 international currencies through our worldwide
operations. We have established a foreign currency hedging program, utilizing
foreign currency forward exchange contracts, or forward contracts, of one fiscal
month duration to hedge various foreign currency transaction exposures. Under
this program, increases or decreases in our foreign currency transactions are
offset by gains and losses on the forward contracts to mitigate the risk of
material foreign currency transaction gains and losses. We do not use forward
contracts for trading purposes. At the end of each fiscal month, all foreign
currency assets and liabilities are revalued using the month end spot rate of
the current forward contracts and the realized and unrealized gains and losses
are recorded and included in net income as a component of other income, net.
We believe that the use of foreign currency financial instruments should reduce
the risks that arise from conducting business in international markets. We
employ established policies and procedures governing the use of financial
instruments to manage our exposure to such risks.
We believe there has been no significant change in our market risk exposures as
what was previously disclosed in our Form 10-K for the year ended March 31,
1999.
33
<PAGE> 34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is incorporated by reference to Note 7 of
Notes to Condensed Consolidated Financial Statements included herein on page 10
of this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of stockholders of Symantec was held on September 15,
1999. (b) Matters voted on at the meeting and votes cast on each were as
follows:
<TABLE>
<CAPTION>
Total Vote Authority
Total Vote Withheld Withheld
For Each From Each From All
Director Director Nominees
---------- ---------- ---------
<S> <C> <C> <C> <C>
1. To elect seven directors to Symantec's
Board of Directors, each to hold office
until his or her successor is elected and
qualified or until his or her earlier
resignation or removal.
Tania Amochaev.............................. 51,230,945 471,046 --
Charles M. Boesenberg....................... 51,020,320 681,670 --
Walter W. Bregman........................... 51,211,701 490,290 --
Carl D. Carman.............................. 51,227,273 474,718 --
Robert R. B. Dykes.......................... 51,231,020 470,971 --
Robert S. Miller............................ 51,223,372 478,619 --
John W. Thompson............................ 51,238,405 463,586 --
</TABLE>
<TABLE>
<CAPTION>
Broker
For Against Abstain "Non-Votes"
---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
2. To consider and act upon a proposal 22,066,404 17,639,398 134,337 --
to (i) amend Symantec's 1996 Equity
Incentive Plan (the "96 Plan") to make
available for issuance an additional
3,211,400 shares of Symantec Common
Stock, which will raise the 96 Plan's
limit on shares that may be issued
pursuant to awards granted from
9,001,802 to 12,213,202.
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
Broker
For Against Abstain "Non-Votes"
---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
3. To consider and act upon a proposal to 28,146,074 11,810,250 130,844 --
amend Symantec's 1998 Employee Stock
Purchase Plan (the "Stock Purchase
Plan") to make available for issuance
an additional 760,000 shares of
Symantec Common Stock, which will
raise the Stock Purchase Plan's limit
by 1% of Symantec's outstanding
shares on each January 1, during the
term of the Stock Purchase Plan.
4. To consider and act upon a proposal to 51,587,481 49,389 65,914 --
ratify the Board of Director's selection
of Ernst & Young LLP as Symantec's
independent auditors for the 2000
fiscal year.
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits. The following exhibits are filed as part of this Form 10-Q:
10.01 Fifth Amendment to Lease, dated as of June 24, 1999, by and
between Colorado Place Partners, LLC and Symantec Corporation,
regarding property located in Santa Monica, California.
10.02 Sixth Amendment to Credit Agreement, dated as of September 23,
1999, by and between Symantec Corporation and Bank of America,
N.A.
10.03 Limited Waiver and Amendment, dated as of September 30, 1999, by
and among Symantec Corporation, Sumitomo Bank Lease and Finance,
Inc., The Bank of Nova Scotia, and The Sumitomo Bank, Limited.
27.1 Financial Data Schedule for the Six Months Ended September 30, 1999.
(b) Reports on Form 8-K
None.
</TABLE>
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 11, 1999 SYMANTEC CORPORATION
By /s/ John W. Thompson
------------------------------
John W. Thompson
Chairman, President and
Chief Executive Officer
By /s/ Gregory Myers
------------------------------
Gregory Myers
Chief Financial Officer and
Chief Accounting Officer
36
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
10.01 Fifth Amendment to Lease, dated as of June 24, 1999, by and
between Colorado Place Partners, LLC and Symantec Corporation,
regarding property located in Santa Monica, California.
10.02 Sixth Amendment to Credit Agreement, dated as of September
23, 1999, by and between Symantec Corporation and Bank of America,
N.A.
10.03 Limited Waiver and Amendment, dated as of September 30, 1999, by
and among Symantec Corporation, Sumitomo Bank Lease and Finance,
Inc., The Bank of Nova Scotia, and The Sumitomo Bank, Limited.
27.1 Financial Data Schedule for the Six Months Ended September 30, 1999.
</TABLE>
<PAGE> 1
EXHIBIT 10.01
FIFTH AMENDMENT TO LEASE
THIS Fifth Amendment to Lease ("AGREEMENT") is made and entered into as
of June 24, 1999 by and between COLORADO PLACE PARTNERS, LLC, a Delaware limited
liability company ("LANDLORD") and SYMANTEC CORPORATION, a Delaware corporation
("TENANT").
1.0 RECITALS.
1.1 LEASE. Landlord and Tenant are parties to that certain Office Lease
dated April 10, 1991 (the "ORIGINAL LEASE") as amended by an Amendment to Lease
and Agreement Re Additional Space dated January 24, 1992 (the "FIRST
AMENDMENT"), a Second Amendment to Lease dated April 11, 1995 (the "SECOND
AMENDMENT"), a Third Amendment to Lease dated September 1, 1997 (the "THIRD
AMENDMENT") and a Fourth Amendment to Lease dated October 2, 1998 (the "FOURTH
AMENDMENT") (collectively, the "LEASE") for premises located in an office
project in Santa Monica, California, all as more particularly described therein.
All terms defined in the Original Lease shall have the same meanings when used
in this Agreement, unless a different meaning is clearly expressed herein.
1.2 CURRENT LEASE PROVISIONS. The Term of the Lease is scheduled to
expire on October 31, 2000. The Premises under the Lease currently consist of
4,848 square feet of Rentable Area (the "EXPIRING PREMISES") located on the
third (3rd) floor of Building "F" at the Project (2500 Broadway), and 107,695
square feet of Rentable Area consisting of 31,276 square feet of Rentable Area
located on the third (3rd) floor of Building "B" at the Project (2525 Colorado
Avenue); 23,999 square feet of Rentable Area located on the first (1st) floor of
Building "F"; and 52,420 square feet of Rentable Area located on the second
(2nd) floor of Building "F." The Expiring Premises are currently subleased by
Tenant to Metro-Goldwyn-Mayer Studios Inc. for a term through October 31, 2000.
The Term of the Lease for the Expiring Premises shall not be extended under this
Agreement.
1.3 AMENDMENT. The parties hereto desire to amend the Lease to extend
the Term of the Lease for all of the Premises other than the Expiring Premises,
and to otherwise modify and amend the Lease as set forth hereinbelow.
2.0 EXTENSION.
- 1 -
<PAGE> 2
The Term of the Lease (for other than the Expiring Premises) is hereby
extended for a period of seven (7) years (the "EXTENSION TERM"), commencing on
November 1, 2000 and expiring on October 31, 2007, unless sooner terminated
pursuant to the Lease, or extended pursuant to Article 8 below. All of the terms
and conditions of the Lease shall apply during the Extension Term, except as set
forth herein. Prior to the commencement of the Extension Term, all of the terms
and conditions of the Lease shall remain in full force and effect, except as
amended hereby.
3.0 PREMISES IMPROVEMENTS.
3.1 IMPROVEMENTS. Tenant shall be entitled to improve, remodel,
refurbish. repair and restore the Tenant Work in the Premises, and all such work
shall be considered Tenant Alterations and shall be subject to the provisions of
Article 9 of the Original Lease, except that Tenant shall not be obligated to
pay the fee to Landlord specified in Paragraph 9.1 (b) of the Original Lease for
Landlord's review and inspection of Tenant Alterations.
3.2 TENANT IMPROVEMENT ALLOWANCE. Tenant shall be paid or credited by
Landlord with an allowance (the "TENANT IMPROVEMENT ALLOWANCE") of One Million
Two Hundred Ninety-Two Thousand Three Hundred Forty Dollars ($1,292,340) in
accordance with the Allowance Schedule (defined below), which reflects Twelve
Dollars ($12.00) per square foot of Rentable Area. The Tenant Improvement
Allowance may be used for (a) the purchase, installation and construction of
Tenant Work which constitutes permanent improvements to the Premises, including,
without limitation, carpeting, (b) built-in furniture, trade fixtures and
equipment, including telephone, computer and data communications equipment, all
of which will be surrendered to Landlord with the Premises upon expiration of
the Lease, and (c) space planning, design and engineering fees, permits,
consultant fees related to the Tenant Work (collectively, the "TENANT
IMPROVEMENT COSTS"). Subject to the Allowance Schedule and Tenant's right to
apply unused portions of the Tenant Improvement Allowance against Basic Rent as
set forth below, portions of the Tenant Improvement Allowance shall be advanced
to Tenant periodically on a monthly basis after commencement of the Tenant Work
by Tenant and after Tenant has delivered to Landlord copies of the original
invoices for Tenant's work or labor performed and materials or supplies
furnished, and, to the extent used for Tenant Work, a certificate from Tenant's
architect or engineer certifying that the work and materials have been furnished
as indicated in such statement and that such work and materials have been
substantially completed in accordance with the plans approved by Landlord in
accordance with Article 9 of the Original Lease. Subject to the Allowance
Schedule, such advances shall be made by Landlord on or before the 25th day of
each month with respect to complete payment requests made by Tenant on or before
the 25th day of the prior month. Tenant shall obtain such verification, reports
and lien releases from contractors, subcontractors and materialmen and shall
satisfy such other standard construction loan disbursement conditions as may be
required by Landlord. Tenant shall be responsible for any payment required in
excess of the amount of the Tenant
- 2 -
<PAGE> 3
Improvement Allowance that Landlord is then required to fund in accordance with
the Allowance Schedule, and Landlord shall not be required to pay more than the
Tenant Improvement Allowance toward all costs, expenses and charges related to
Tenant's tenant improvement expenses. Ten percent of the Tenant Improvement
Allowance may be withheld by Landlord until Tenant provides unconditional lien
releases with respect to all work already performed on the Tenant Work.
Notwithstanding anything to the contrary contained herein, Landlord shall not be
obligated to pay or credit the Tenant Improvement Allowance except in accordance
with the following schedule (the "ALLOWANCE SCHEDULE"):
<TABLE>
<S> <C>
November 1, 2001 $258,468
November 1, 2002 $258,468
November 1, 2003 $258,468
November 1, 2004 $258,468
November 1, 2005 $258,468
</TABLE>
With respect to any portion of the Tenant Improvement Allowance not used by
Tenant in accordance with the Allowance Schedule and the other provisions of
this Section 3.2, Tenant shall be entitled to credit such portion of the Tenant
Improvement Allowance then available under the Allowance Schedule and not used
by Tenant against the next installment(s) of Basic Rent falling due under the
Lease as amended hereby. Tenant shall give Landlord notice of Tenant's use of
any such credit concurrently with, or prior to, Tenant's payment of the Basic
Rent against which such credit is then being applied.
3.3 SERVICES. Landlord, at Landlord's cost, and subject to the
requirements of existing tenants in the Project, shall provide to Tenant and its
contractors, in connection with any Tenant Alterations and subject to the
Project's rules and regulations with respect thereto, the non-exclusive use of
Landlord's personnel and material freight elevators, loading docks and related
facilities as may be reasonably required to enable Tenant and its contractors to
perform the Tenant Alterations during Normal Working Hours (collectively, the
"SERVICES"). During construction and installation of Tenant Alterations, Tenant
shall not be charged for the non-exclusive use of the Services during Normal
Working Hours, except that the cost of such use shall be included in Operating
Expenses for the Project. Any Services utilized by Tenant after Normal Working
Hours, or which are required by Tenant and used by Tenant on an exclusive basis,
shall be paid for by Tenant at the current quoted rates for Landlord's provision
of such Services.
4.0 RENT.
4.1 EXTENSION TERM.
- 3 -
<PAGE> 4
(a) Subject to Section 4.2 below, Commencing on November 1, 2000 and
continuing through October 31, 2005, Tenant shall pay Basic Rent in the amount
of Three Million Fifteen Thousand Four Hundred Fifty Six Dollars ($3,015,456)
annually (which is approximately equal to $28.00 per square foot of Rentable
Area), payable in advance in equal monthly installments of Two Hundred Fifty-One
Thousand Two Hundred Eighty-Eight Dollars ($251,288).
(b) Subject to Section 4.2 below, Commencing on November 1, 2005 and
continuing through the expiration of the Extension Term on October 31, 2007,
Tenant shall pay Basic Rent in the amount of Three Million Two Hundred
Eighty-Four Thousand Seven Hundred Dollars ($3,284,700) annually (which is
approximately equal to $30.50 per square foot of Rentable Area), payable in
advance in equal monthly installments of Two Hundred Seventy-Three Thousand
Seven Hundred Twenty-Five Dollars ($273,725).
4.2 RENT ABATEMENT. Notwithstanding the foregoing, provided Tenant is
not in default hereunder or under the Lease, Tenant shall not be obligated to
pay Basic Rent and the first $107,246 of Additional Rent pursuant to Paragraphs
5.1(a), 5.2(a) and 5.3(a) of the Original Lease for the following months of the
Extension Term: November 2000, December 2000, January 2001, November 2005, and
December 2005, and Tenant shall not be obligated to pay the first $345,427 of
the sum of the Basic Rent and Additional Rent pursuant to Paragraphs 5.1(a),
5.2(a) and 5.3(a) of the Original Lease for the month of November 2006;
provided, however, Tenant shall be obligated on the commencement of the
Extension Term, and for all periods thereafter, to pay all other Additional Rent
payable under the Lease as amended hereby.
4.3 SECURITY DEPOSIT. No security deposit shall be required from Tenant
with respect to the Lease during the Renewal Term. Landlord and Tenant
acknowledge that Tenant previously has deposited the sum of Eighty-Eight
Thousand Nine Hundred One Dollars ($88,901) as security (the "SECURITY DEPOSIT")
pursuant to Section 4.6 of the First Amendment, Section 4.6 of the Second
Amendment and Section 3.3 of the Third Amendment (the "SECURITY DEPOSIT
PROVISIONS"). Such amount shall be credited by Landlord against the Basic Rent
payable by Tenant for the month of February 2001; thereafter, Landlord and
Tenant shall have no further rights or obligations with respect to the Security
Deposit, and the Security Deposit Provisions shall thereupon be deemed deleted
and without any further force or effect.
5.0 ADDITIONAL RENT. Subject to Section 4.2 above and the provisions of this
Article 5, Tenant shall continue to pay all Additional Rent set forth in the
Lease during the Extension Term.
5.1 PROP 13. If, during the Extension Term, there are two (2) transfers
of the Project or an interest therein, each of which causes an increase in the
Real Property Taxes allocable to the Premises under the Lease due to a
reassessment of the Project or such interest therein under
- 4 -
<PAGE> 5
Article XIIIA of the Constitution of the State of California (a "PROP 13
INCREASE"), then, in the event of a third or subsequent Prop 13 Increase during
the Extension Term, the Real Property Taxes allocable to the Premises under the
Lease shall be reduced by the amount of the increase in the Real Property Taxes
attributable to such third or subsequent Prop 13 Increase. In addition, if the
second Prop 13 Increase occurs prior to November 1, 2003, the Real Property
Taxes allocable to the Premises under the Lease shall be reduced by one-half (_)
of the amount of the increase in Real Property Taxes attributable to such second
Prop 13 Increase. Any reduction under this Section 5.1 and Paragraph 13.3(c)
below shall be referred to as a "PROP 13 REDUCTION." There shall be no Prop 13
Reduction with respect to the first or second Prop 13 Increase during the
Extension Term, if any, subject to the foregoing provisions regarding a second
Prop 13 Increase occurring prior to November 1, 2003. Notwithstanding any Prop
13 Reduction, Tenant shall pay the Real Property Taxes allocable to the Premises
and increases thereof that would have occurred "but for" any Prop 13 Increase
for which Tenant is entitled to a Prop 13 Reduction. In addition, if Tenant
becomes entitled to a Prop 13 Reduction and if at any time there occurs a
reassessment of the Project because of a systemic change in the method or timing
of assessments, including, without limitation, the enactment into law of a
method by which the Project would be reassessed on an annual or other periodic
basis (a "SYSTEMIC REASSESSMENT"), and such reassessment causes the assessed
value of the Project to be greater than the assessed value of the Project
immediately prior to the occurrence of such reassessment, the Prop 13 Reduction
shall be terminated, prorated to the effective date of such reassessment.
Similarly, if Tenant becomes entitled to a Prop 13 Reduction and subsequently
there occurs a Systemic Reassessment which results in, or but for the higher
assessed value which gave rise to the Prop 13 Reduction would have resulted in,
an assessed value of the Project or portion thereof which results in Real
Property Taxes payable by Tenant greater than Real Property Taxes that would
have been payable by Tenant absent the Prop 13 Increase, but less than the
assessed value which gave rise to the Prop 13 Reduction, the Prop 13 Reduction
shall be reduced, prorated to the effective date of the Systemic Reassessment
(or the date on which such reassessment would have been effective) to an amount
equal to the amount by which the Real Property Taxes payable by Tenant absent
the Prop 13 Reduction exceeds the Real Property Taxes that would have been
payable but for the higher assessed value which gave rise to the Prop 13
Reduction.
5.2 AFTER HOURS HVAC. Landlord's provision of HVAC services during other
than Normal Working Hours ("AFTER HOURS HVAC"), for which Landlord is entitled
to impose a reasonable direct charge under Section 8.3 of the Original Lease,
shall be subject to the following terms and conditions:
(a) Landlord shall provide the After Hours HVAC in the event Tenant
gives Landlord advance notice of its need for such service no later than 3:00
p.m. on Monday through Friday (except holidays referred to above) that Tenant
requires the services, and no later than 3:00 p.m. on the last business day
preceding the weekend or holiday that Tenant requires the service; provided
further, however, if Tenant requests such service after 3:00 p.m. as set forth
- 5 -
<PAGE> 6
above, Landlord shall nonetheless use its commercially reasonable efforts to
provide such service as requested.
(b) Landlord will provide the After Hours HVAC at the "ACTUAL COST,"
which is defined as the actual costs incurred by Landlord (including Landlord's
reasonable estimated related administrative cost for the cost of services not
already included in Operating Expenses and if applicable, depreciation related
to increased utilization of HVAC related equipment) in providing the After Hours
HVAC. The foregoing direct charges shall be payable by Tenant as Additional Rent
on the next rent payment date at least fifteen (15) days following submission of
a reasonably detailed invoice therefor by Landlord. Currently, charges for After
Hours HVAC in Building "F" are Seventy-Five Dollars ($75.00) per hour, full
floor, and Forty-Five Dollars ($45.00) per hour, partial floor; and in Building
"B," are Eighty Dollars ($80.00) per hour, full floor, and Forty Dollars
($40.00) per hour, partial floor.
(c) During the Extension Term and provided Tenant is not in default
under the Lease, Tenant shall be entitled to a monthly credit against charges
for After Hours HVAC in the amount of Four Thousand One Hundred Sixty Seven
Dollars ($4,167) per month. Such credit (the "HVAC CREDIT") may be used at
Tenant's discretion for its use of After Hours HVAC, and any amount of the HVAC
Credit not applied to charges accrued as of December 31 of any year during the
Extension Term may be carried forward and applied to After Hours HVAC charges
incurred prior to December 31 of the following year, provided that any HVAC
Credit accrued prior to December 31 of a particular year may not be carried
forward and applied to any charges incurred after December 31 of the year
following said particular year. The credits hereunder may not be applied against
any amount other than charges for After Hours HVAC.
6.0 IDENTITY
Tenant shall be entitled, subject to the availability of signage
entitlements under the Development Agreement (defined in Section 2.2 of the
Original Lease) and subject to obtaining approvals from Metro-Goldwyn-Mayer
Studios Inc. (or the successor to its lease for premises at the Project), the
City of Santa Monica and any other required governmental approvals, to
non-exclusive monument signage displaying Tenant's name in its logo type at the
Project in a location mutually agreed upon by Landlord and Tenant. The location,
size, materials, coloring and lighting of such signage and the monument shall be
subject to Landlord's approval and shall be consistent and compatible with the
Project's design, signage and graphics programs and all applicable rules and
regulations of the governmental agencies having jurisdiction. The identification
and signage rights of this Article 6 are personal and specific to Tenant and are
not transferrable by sublease, assignment, operation of law or otherwise. The
design, installation, maintenance, repair, restoration and removal (including
restoration of the monument upon which the same was located, or removal of the
monument itself if so elected by Landlord, upon expiration of the Lease or any
earlier termination of Tenant's signage rights hereunder) of Tenant's signage
shall be at Tenant's sole cost and expense. All of the foregoing identity and
- 6 -
<PAGE> 7
signage rights in this Article 6 shall apply only while Tenant pays Basic Rent
(in accordance with the Lease) for and personally occupies at least one hundred
thousand (100,000) square feet of Rentable Area in the Project (the "OCCUPANCY
THRESHOLD"). Such rights shall be null and void at such time as Tenant fails to
pay Basic Rent (in accordance with this Lease) for and personally occupy at
least one hundred thousand (100,000) square feet of Rentable Area in the Project
and upon such failure, Landlord shall be entitled to immediately remove Tenant's
signage. Tenant shall pay to Landlord any costs incurred by Landlord in
connection with the design, installation, maintenance, repair, restoration and
removal of Tenant's signage within thirty (30) days after demand therefor.
7.0 PARKING
Effective on November 1, 1999, Section 7.1 of the Original Lease is
hereby amended to read in its entirety as follows:
7.1 TENANT'S PARKING RIGHTS. Tenant shall be provided with and shall
rent for the entire Term of this Lease, three and two-tenths (3.2)
monthly parking passes for the parking of automobiles in the Parking
Garage for each 1,000 square feet of Rentable Area in the Premises.
Tenant shall pay as Additional Rent the monthly parking pass rent for
such passes equal to the prevailing parking rate posted in the Parking
Garage from time to time during the Term hereof, which rate shall be
determined by Landlord based upon the prevailing market rates for
similar parking rights in first class office projects in the Santa
Monica/West Los Angeles area; provided that the rent for parking passes
hereunder shall be One Hundred Fourteen and 55/100 Dollars ($114.55) per
pass, per month (exclusive of taxes) for the period from July 1, 1999
through October 31, 2000, and shall not increase thereafter by more than
five percent (5%) annually, on a cumulative basis. To the extent
available, Tenant shall have the right to validate parking for Tenant's
invitees upon reasonable, nondiscriminatory terms and conditions and
subject to reasonable, nondiscriminatory rules and regulations
established from time to time by Landlord or Landlord's operator or
licensee; provided that Tenant shall offer validated parking for a
minimum of three (3) hours to all regular business visitors and
customers at the Premises.
8.0 RENEWAL TERM.
8.1 PRIOR RIGHT. Tenant's right to renew the Term of the Lease as set
forth in Section 3.5 of the Original Lease is hereby without any force or
effect, and in lieu thereof Tenant shall have the right to renew as set forth in
Section 8.2 below.
8.2 RENEWAL TERM.
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(a) Provided Tenant is not in default under the Lease (after any
applicable notice and lapse of applicable cure periods) as of the date of
exercise or the commencement of the renewal term ("RENEWAL TERM COMMENCEMENT
DATE"), Tenant shall have the option to renew the Term of the Lease ("RENEWAL
OPTION") for the entire Premises for one period of five (5) years commencing on
November 1, 2007 and expiring on October 31, 2012 ("RENEWAL Term"), exercisable
by giving written notice thereof ("RENEWAL NOTICE") to Landlord of its exercise
of the Renewal Option not later than February 1, 2007. (Landlord shall make a
good faith effort to notify Tenant of the last day for Tenant's exercise of the
Renewal Option at least thirty (30) days prior to such date, but failure by
Landlord to provide such notice shall not constitute a default by Landlord under
the Lease.)
(b) The Basic Rent payable hereunder for the Premises during the
Renewal Term shall be adjusted to the Fair Market Rental Rate (as defined in
Section 35.1 of the Original Lease, provided that such rate shall be determined
based on leases for space within the Project of comparable size to the Premises
and which are entered into within the eighteen (18) month period prior to the
date such rate is determined hereunder with tenants having similar
creditworthiness as Tenant, if and to the extent such comparable transactions
are available for comparison). Landlord shall notify Tenant of Landlord's
determination of the Fair Market Rental Rate not later than May 1, 2007, and
such determination shall be subject to Tenant's appraisal rights set forth in
Section 35.1 of the Original Lease, provided that references therein to the
definition of the Fair Market Rental Rate set forth in Section 35.2 of the
Original Lease shall mean said Section 35.2 as modified by the provisions of
this Paragraph.
(c) During the Renewal Term, Tenant shall pay Additional Rent in
accordance with the provisions of Article 5 of the Original Lease, as amended.
(d) The Renewal Option set forth in this Section 8.2 is personal to
Tenant and may not be assigned, transferred or conveyed to any party, except in
connection with an assignment of the Lease in its entirety to an Affiliate or
Successor of Tenant (as defined in Section 15.1 of the Original Lease), and may
be exercised only if Tenant or an Affiliate or Successor of Tenant is in
possession of the entire Premises without Sublease or Assignment to any other
Person.
9.0 NON-DISTURBANCE.
Landlord shall use good faith efforts to obtain for Tenant's benefit a
non-disturbance agreement with respect to this Agreement from the existing
holder of the first trust deed Underlying Mortgage affecting the Project, which
agreement shall be consistent with the provisions of Article 19 of the Original
Lease; provided that failure to obtain such agreement shall not constitute
default by Landlord hereunder or under the Lease. Notwithstanding the
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foregoing, Landlord agrees to provide to Tenant within ninety (90) days from
Tenant's execution of this Agreement, a non-disturbance agreement
("NON-DISTURBANCE AGREEMENT") from any holder of an existing Underlying Mortgage
whose encumbrance or lien affecting the Land, Project and/or Building is
superior to the leasehold estate created hereby. The final form of any such
Non-Disturbance Agreement shall be in a commercially reasonable form reasonably
agreed upon by Landlord and Tenant and provided by the holder of each Underlying
Mortgage who is required to provide a Non-Disturbance Agreement. If Landlord
fails to deliver such Non-Disturbance Agreement to Tenant within ninety (90)
days after execution of this Agreement, Tenant may terminate the Lease as
amended hereby by written notice to Landlord within sixty (60) days after
expiration of said ninety (90) day period, and neither party shall have any
further rights, duties or obligations to each other under the Lease.
10.0 BROKER.
Tenant warrants that it has not had any contact or dealings with any
person or real estate broker other than The Seeley Company ("BROKER") which
would give rise to the payment of any fee or brokerage commission in connection
with this Agreement, and Tenant shall indemnify, defend, protect and hold
harmless Landlord from and against any liability with respect to any fee or
brokerage commission (except one owing to Broker) arising out of any act or
omission of Tenant. Landlord covenants and agrees to pay all real estate
commissions due in connection with this Agreement to Broker in accordance with
the commission agreement executed by Landlord.]
11.0 RIGHT OF FIRST OFFER.
Effective upon execution and delivery hereof, Article 34 of the Lease is
deleted and the following is hereby substituted in its place:
34. RIGHT OF FIRST OFFER.
34.1 PROPOSAL TO LEASE. Subject to Section 34.2, and provided Tenant
is not in default hereunder, whenever any Rentable Area located on any floor on
which the Premises are located is available for lease to others (the "AVAILABLE
Space"), Tenant shall have a right of first offer as set forth herein. Provided
Tenant has given Landlord notice of Tenant's interest in leasing Available Space
(which notice shall contain the approximate amount of Rentable Area in which
Tenant is interested) Landlord shall not, within ninety (90) days after receipt
of such notice, enter into or commit to enter into any lease of Available Space
without first proposing to Tenant a rent and other lease terms for such space.
In no event shall the Basic Rent for the Available Space per square foot of
Rentable Area be less than the Basic Rent per square foot of Rentable Area
payable by Tenant for the Premises initially leased hereunder, as the same is
adjusted from
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<PAGE> 10
time to time hereunder. The Basic Rent for Available Space shall be adjusted in
accordance with the provisions of Article 5 of the Lease. If Tenant does not
accept the terms of such proposal within five (5) days after receipt thereof, or
does not execute an appropriate lease amendment reflecting such acceptance
within fifteen (15) days after receipt thereof, Landlord shall be free to lease
such space to any other Person.
34.2 TERMINATION OF RIGHT. Tenant's rights under this Article 34
shall expire on October 31, 2007. Tenant's rights under this Article 34 also
shall expire on the date Tenant fails to continuously pay rent for (in
accordance with this Lease) and personally occupy at least one hundred thousand
(100,000) square feet of Rentable Area in the Project. Available Space shall not
include space for which existing leases are being renewed, space leased to other
tenants which have the right to sublease or from which Landlord has the right to
sublease or accept an assignment back, and space for which Landlord is in active
negotiation with a third party at the time Tenant gives its notice of interest
referred to in Section 34.1 above; nor shall Available Space include space which
is the subject of an option to expand or a right of first offer granted to any
other person or tenant and existing on the date hereof or which is hereafter
granted without violation of Tenant's rights under this Article.
34.3 SAME TERMS AND CONDITIONS. As of the date that Landlord
delivers actual possession to Tenant of any Available Space leased by Tenant,
such Available Space shall become part of the Premises and, except as otherwise
provided in this Article 34, shall be leased upon the same terms and conditions
as the Premises. [The Tenant Improvement Allowance set forth in Article 3 above
shall be computed without regard to any Available Space leased by Tenant.]
34.4 PERSONAL RIGHT. Tenant's right to lease Available Space as set
forth in this Article 34 is personal to Tenant and may not be assigned,
transferred or conveyed to any party, except in connection with an assignment of
the Lease in its entirety to an Affiliate or Successor of Tenant (as defined in
Lease Section 15.1).
12.0 OTHER LEASE PROVISIONS.
12.1 DELETION. Effective on November 1, 2000, the following provisions
of the Original Lease are hereby deleted and shall be without any further force
or effect: Section 3.6 [Tenant Cancellation for Failure to Complete] and Section
4.4 [Rent Credit].
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<PAGE> 11
12.2 PARTNER LIABILITY. Section 37.14 of the Original Lease is hereby
deleted and the following is hereby substituted in its place:
37.14 PARTNER LIABILITY. Tenant acknowledges that Landlord is a
limited liability company formed under the laws of the State of Delaware whose
manager is MP-Colorado Place Manager I, Inc., a Delaware corporation. Tenant
agrees that, in any action arising out of or relating to the performance of this
Lease, Tenant will proceed only against Landlord or its successors and assigns
and not against any member or manager of Landlord (or in any entity to which
Landlord may assign this Lease), or any of such members' or manager's directors,
officers, employees, agents, shareholders, partners, members, managers or
affiliates. Notwithstanding anything in this Lease or any law to the contrary,
the liability of Landlord hereunder (including any successor landlord hereunder)
and any recourse by Tenant against Landlord shall be limited solely to the
interest of Landlord in the Project, and neither Landlord, nor any of its
constituent members or managers, nor any of their respective affiliates,
partners, members, managers, directors, officers, employees, agents or
shareholders shall have any personal liability therefor, and Tenant, for itself
and all persons claiming by, through or under Tenant, expressly waives and
releases Landlord and such related persons and entities from any and all
personal liability. The provisions of this Section 37.14 are enforceable by both
Landlord and any member or manager of Landlord, and shall survive the expiration
or termination of this Lease.
13.0 SEGREGATION OF BUILDINGS.
13.1 PARCEL RECONFIGURATION. Landlord and Tenant acknowledge that the
Project contains six (6) separate buildings (collectively, the "PROJECT
BUILDINGS," and individually, a "PROJECT BUILDING") located on the Land and that
the Premises are located in Building "B" and Building "F" as described in
Section 1.2 above. The Land consists of the parcels described in Exhibit "A" to
the Original Lease ("ORIGINAL PARCELS"). Landlord shall have the right to divide
the Land into parcels other than as included in the Original Parcels, by
subdivision, lot line adjustment or other means, and to configure such parcels
(collectively, the "RECONFIGURED PARCELS," and individually, a "RECONFIGURED
PARCEL") and the Project Buildings so that one or more Project Buildings are
situated on a separate parcel or parcels.
13.2 OWNERSHIP. Landlord shall be entitled to transfer, assign or
convey one or more of the Reconfigured Parcels and/or Project Buildings, or any
interest therein, to any Person separately from the remaining Reconfigured
Parcels and Project Buildings (herein, a "SEPARATE TRANSFER"). Any such Person
to whom a Reconfigured Parcels and/or Project Building, or any interest therein,
is so transferred shall be referred to as a "NEW OWNER." For purposes hereof,
"New Owner" also shall include Landlord with respect to any Reconfigured Parcels
and/or
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<PAGE> 12
Project Buildings, or any interest therein, transferred to, or retained by,
Landlord. Any Separate Transfer shall be subject to the provisions of Article 18
of the Original Lease. The Reconfigured Parcels may be made subject to an
agreement or agreements ("NEW CCRS") providing for reciprocal rights of access,
use and enjoyment of the Project, its common area, including, without
limitation, the Parking Garage, and for the allocation of all or a portion of
the Operating Expenses, Real Property Taxes and Capital Improvement Amortization
for the Project among the Reconfigured Parcels and Project Buildings in an
equitable manner as determined by Landlord and/or the New Owners, provided that
any New CCRs shall not operate to increase the amount of Project Expenses
payable by Tenant under the Lease nor shall any New CCRs have a material,
adverse effect on Tenant's rights under the Lease. Tenant agrees that the Lease
shall be subject and subordinate to the New CCRs, and agrees to execute any
document reasonably required to evidence such subordination or which may be
required to facilitate any Separate Transfer permitted hereunder.
13.3 SEGREGATION OF LEASES. If, as a result of any Separate Transfer,
Building "B" and Building "F" are located on different Reconfigured Parcels
which are owned by different New Owners, or if portions of the Premises are
located in more than one Project Building which are owned by different New
Owners, the Lease, upon the election of any such New Owner, shall be considered
separate leases by Tenant with each of the New Owners with respect to the
portion of the Premises contained in the Project Building or Project Buildings
held by each such New Owner. Each New Owner under each such Separate Lease with
Tenant (herein, collectively, the "SEPARATE LEASES," and individually, a
"SEPARATE LEASE") shall be deemed to have assumed and agreed to observe and
perform any and all obligations of Landlord under the Lease with respect to the
portion of the Premises located within the Project Buildings owned by such New
Owner, and Tenant shall be deemed to have accepted each such New Owner as its
landlord under the applicable Separate Lease and shall be bound to perform all
of Tenant's obligations thereunder with respect to the portion of the Premises
located in the Project Buildings which are owned by such New Owner. Upon request
by Landlord or any New Owner, Tenant and each New Owner shall execute and
deliver a new lease and other documentation reasonably required to evidence and
confirm the terms and provisions of any Separate Lease, consistent with the
terms hereof. Landlord shall reimburse Tenant for any out-of-pocket costs and
expenses incurred by Tenant for the review, execution and delivery of any such
documentation. All rights and obligations of Landlord and Tenant under the Lease
shall be allocated to any Separate Lease pro rata based upon the amount of
Rentable Area contained in the Project Building(s) which are the subject of each
Separate Lease, to the extent such rights and obligations are based upon the
amount of Rentable Area contained in the entire Premises under the Lease. Each
Separate Lease otherwise shall incorporate all the terms and provisions of the
Lease, and the following specific provisions shall apply to the allocation of
rights and obligations among any Separate Leases.
(a) DEFINITIONS. References to the "Premises" in the Lease, as
incorporated into any Separate Lease, shall mean the portion of the Premises
located in the Project Building(s)
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<PAGE> 13
which are the subject of the applicable Separate Lease. References to the
"Building" in the Lease, as incorporated into any Separate Lease, shall mean the
Project Building(s) which are the subject of the applicable Separate Lease.
References to the "Land" in the Lease, as incorporated into any Separate Lease,
shall mean the Reconfigured Parcel(s) owned by the New Owner which is the
landlord under the applicable Separate Lease. References to "Landlord" in the
Lease, as incorporated into any Separate Lease, shall mean the New Owner with
respect to the Project Buildings which are the subject of the applicable
Separate Lease.
(b) BASIC RENT. The right to receive and the obligation to pay Basic
Rent and the Basic Rent and Additional Rent abatement set forth in Section 4.4
of the Second Amendment shall be divided among the Separate Leases pro rata
based upon the amount of Rentable Area subject to each Separate Lease.
(c) PROJECT EXPENSES. The allocation of Operating Expenses, Real
Property Taxes and Capital Improvement Amortization shall be made separately
under each Separate Lease based upon the amount thereof incurred with respect to
the Reconfigured Parcel(s) and Project Building(s) located thereon, subject to
the New CCRs. There shall be no material increase in the aggregate obligations
of Tenant as a result of such separate allocation. The provisions of Section 5.1
above shall be applied, and availability of any Prop 13 Reduction shall be
determined, separately with respect to the Project Building(s) under each
Separate Lease. For such purposes, any Prop 13 Increase occurring prior to or
concurrent with any Separate Transfer shall be considered a Prop 13 Increase
only with respect to the portions of the Premises within a Project Building
affected by such Prop 13 Increase. Notwithstanding any provision to the contrary
contained in Section 5.1 above, if a Prop 13 Increase occurs solely due to the
creation of the Reconfigured Parcels and such creation of the Reconfigured
Parcels does not occur concurrently with a transfer of the Project, a portion
thereof, or an interest therein which would otherwise cause a Prop 13 Increase,
such as, for example, a sale or other transfer of a portion of the Project or an
interest therein to a third party, then (i) the Real Property Taxes allocable to
the Premises under the Lease shall be reduced by the amount of the increase in
Real Property Taxes attributable to such Prop 13 Increase occurring solely due
to the creation of the Reconfigured Parcels, and (ii) any such Prop 13 Increase
occurring solely due to the creation of the Reconfigured Parcels shall not be
considered a first, second, third or any subsequent Prop 13 Increase referred to
in Section 5.1, but the Prop 13 Reduction therefor shall otherwise be subject to
the provisions of Section 5.1.
(d) ALLOWANCE. The right to receive and the obligation to pay the
Tenant Improvement Allowance and the amounts set forth on the Allowance Schedule
shall be divided among the Separate Leases pro rata based upon the amount of
Rentable Area subject to each Separate Lease.
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<PAGE> 14
(e) HVAC CREDIT. The amount, the right to receive and the obligation
to pay the HVAC Credit shall be divided among the Separate Leases pro rata based
upon the amount of Rentable Area subject to each Separate Lease.
(f) PARKING. The number of parking passes, the right to receive and
the obligation to pay parking pass rent shall be divided among the Separate
Leases pro rata based upon the amount of Rentable Area subject to each Separate
Lease. Parking rights shall be subject to the New CCRs.
(g) RENEWAL. The Renewal Option shall continue to be exercisable
only with respect to the entire Premises. Exercise thereof as to the Premises in
any Project Building shall constitute exercise thereof with respect to all
Premises in the Project. Determination of the Fair Market Rental Rate for the
Renewal Term, however, shall be made separately by each New Owner as landlord
under each Separate Lease, but in each case with reference to the size of the
entire Premises in the Project subject to the Renewal Option. Tenant and each
New Owner shall have the appraisal rights set forth in Section 35.1 of the
Original Lease separately with respect to the portion of the Premises under each
Separate Lease.
(h) RIGHT OF FIRST OFFER. The provisions of Article 11 above
regarding Tenant's right of first offer shall apply separately to each Separate
Lease and the portion of the Premises which is subject to each such Separate
Lease.
(i) DAMAGE AND CONDEMNATION. The provisions of Articles 13 and 14 of
the Original Lease shall apply separately to the portion of the Premises under
each Separate Lease, and the rights to terminate thereunder shall be determined
and exercised separately with respect to the portion of the Premises under each
Separate Lease, subject, however, to the following.
In the event a New Owner under a Separate Lease ("TERMINATING
OWNER") elects to terminate such Separate Lease (the "OWNER TERMINATED LEASE")
pursuant to any of the provisions of Articles 13 and 14 of the Original Lease,
Tenant shall have the option to terminate its Separate Lease with each other New
Owner (individually and collectively, a "NON-TERMINATING OWNER"), such option to
be elected by Tenant by written notice given to the Non-Terminating Owner (the
"TENANT'S TERMINATION NOTICE") within thirty (30) days after receipt of the
notice of termination from the Terminating Owner, subject to the following.
Before any such election to terminate any Separate Lease with a Non-Terminating
Owner is effective, the Non-Terminating Owner shall have the right (but not the
obligation) to render Tenant's Termination Notice ineffective by electing, by
written notice given to Tenant within thirty (30) days after receipt of Tenant's
Termination Notice, to provide space in the Project ("REPLACEMENT SPACE") within
one hundred twenty (120) days after the Non-Terminating Owner makes such
election, at the same rental rate as set forth in the Owner Terminated Lease.
Any such Replacement Space shall be reasonably equivalent to the premises under
the Owner Terminated Lease in size and
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<PAGE> 15
quality and utility of improvement. If the Non-Terminating Owner does not elect
to provide Replacement Space, Tenant's Termination Notice shall be effective to
terminate the Separate Lease with the Non-Terminating Owner on the date which is
sixty (60) days after the Tenant's Termination Notice was given.
(j) 3,000 SQUARE FOOT SUBLEASE. Tenant shall have the right to a
"3,000 Square Foot Sublease" (as defined in Paragraph 15.1(a) of the Original
Lease) with respect to each of its Premises located in Building "B" and Building
"F".
(k) SUBORDINATION. The provisions of Article 19 of the Original
Lease, regarding subordination and Underlying Mortgages, shall apply separately
to the Reconfigured Parcel(s) and Project Building(s) owned separately by a New
Owner, provided, however, each such New Owner shall have up to ninety (90) days
after creation of the Reconfigured Parcels to obtain for Tenant's benefit a
non-disturbance agreement from the holder of the first trust deed Underlying
Mortgage affecting the Reconfigured Parcel(s) and Project Building(s) owned by
such New Owner.
(l) HOLDOVER. The provisions of Article 23 of the Original Lease
regarding holdover shall apply separately to each Separate Lease and the portion
of the Premises which is subject to each such Separate Lease.
(m) DEFAULT BY TENANT. The provisions of Article 24 of the Original
Lease regarding default by Tenant and Landlord's remedies shall apply separately
to each Separate Lease and the rights and obligations of Tenant and the New
Owner which is the landlord thereunder; provided that, at the election of any
New Owner with respect to such New Owner's Separate Lease, any default by Tenant
under any other Separate Lease shall constitute a default by Tenant under the
Separate Lease with such New Owner.
(n) LANDLORD DEFAULT; NOTICE; RIGHT TO CURE DEFAULT. In the event
of a default by a New Owner under a Separate Lease ("DEFAULTING OWNER"),
Tenant's rights and remedies shall apply separately to each Separate Lease and
the Defaulting Owner as landlord thereunder; provided that, at the election of
Tenant, any default by a Defaulting Owner under its Separate Lease shall
constitute a default by each other New Owner under its respective Separate Lease
(individually and collectively, a "NON-DEFAULTING OWNER"), subject to the
following. Before (i) a Non-Defaulting Owner shall be liable to Tenant for any
default by a Defaulting Owner, (ii) the Separate Lease of any Non-Defaulting
Owner is terminated, (iii) Tenant exercises any right to abate rent or offset
against rent thereunder or (iv) any of the Non-Defaulting Owner's rights
thereunder or in connection therewith are forfeited or adversely affected
because of any default by a Defaulting Owner, Tenant shall give express written
notice of such default to the Non-Defaulting Owner specifying the nature of such
default, and thereupon the Non-Defaulting Owner shall have the right (but not
the obligation) to cure such default, and Tenant
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<PAGE> 16
shall not exercise any rights with respect to the Separate Lease of a
Non-Defaulting Owner due to such default, including, without limitation,
terminating such Separate Lease and abating the rent payable thereunder by
reason of such default unless and until it has afforded the Non-Defaulting Owner
thirty (30) days after the expiration of such time as the Defaulting Owner was
permitted to cure such default and a reasonable period of time in addition
thereto if the circumstances are such that said default cannot reasonably be
cured within said thirty (30) day period and the Non-Defaulting Owner has
commenced and is diligently pursuing such cure. The aforesaid thirty (30) day
period shall not commence if there is a valid dispute as to whether a default by
the Defaulting Owner has occurred, until it is determined (by judicial process
if elected by Tenant or the Defaulting Owner) that such a default has, in fact,
occurred, and the Non-Defaulting Owner has received notice of such
determination.
(o) IDENTITY. Tenant shall be entitled to the rights set forth
Article 6 above for only one (1) monument at the Project, and the rights and
obligations thereunder shall be included in the Separate Lease for the
Reconfigured Parcel upon which the monument is located. The Occupancy Threshold
shall, however, continue to be determined with respect to the aggregate amount
of Rentable Area occupied by Tenant under all Separate Leases in the Project.
(p) PARTNER LIABILITY. The provisions of Section 37.14 of the
Original Lease, as modified by Section 12.2 above, shall apply with respect to
each Separate Lease and each New Owner as landlord thereunder.
14.0 MISCELLANEOUS.
14.1 LEASE RATIFIED; PRIOR AGREEMENTS. Except as specifically amended or
modified herein, each and every term, covenant, and condition of the Lease as
amended is hereby ratified and shall remain in full force and effect. Effective
on commencement of the Extension Term, all other agreements and understandings
between Landlord and Tenant regarding Tenant's lease and occupancy of the
Premises shall be deemed merged into the Lease as amended hereby, and shall
otherwise be without any further force or effect.
14.2 BINDING AGREEMENT. This Agreement shall be binding upon and inure
to the benefit of the parties hereto, their legal representatives, successors
and permitted assigns.
14.3 GOVERNING LAW. This Agreement shall be interpreted and construed in
accordance with the law of the State of California.
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<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
LANDLORD:
COLORADO PLACE PARTNERS, LLC
a Delaware limited liability company
By: MP-COLORADO PLACE MANAGER I, INC.
a Delaware corporation
Manager
By: /S/ Robert F. Maguire, III
-------------------------------
Name: Robert F. Maguire, III
------------------------
Title: Managing Partner
-------------------------
Date Signed: 08-09-99
-------------------
TENANT:
SYMANTEC CORPORATION
a Delaware corporation
By: /S/ Derek Witte
----------------------------------
Name: Derek Witte
--------------------------
Title: VP, Worldwide Operations
--------------------------
Date Signed: 7/27/99
--------------------
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<PAGE> 1
EXHIBIT 10.02
SIXTH AMENDMENT TO CREDIT AGREEMENT
THIS SIXTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
September 23, 1999, effective for all purposes as of July 20, 1999, is entered
into by and between SYMANTEC CORPORATION (the "Borrower") and BANK OF AMERICA,
N.A., formerly known as Bank of America National Trust and Savings Association
(the "Bank").
RECITALS
A. The Borrower and the Bank are parties to a Second Amended and
Restated Credit Agreement dated as of March 28, 1996, as amended by a First
Amendment to Credit Agreement dated as of October 17, 1996, a Second Amendment
to Credit Agreement dated as of March 3, 1997, a Third Amendment to Credit
Agreement dated as of March 29, 1998, a Fourth Amendment to Credit Agreement
dated as of May 28, 1998, and a Fifth Amendment to Credit Agreement dated as of
January 26, 1999, effective as of January 1, 1999 (as so amended, the "Credit
Agreement") pursuant to which the Bank has extended certain credit facilities to
the Borrower and certain of its Subsidiaries or Affiliates, on and subject to
the terms and conditions set forth therein.
B. The Borrower has requested that the Bank agree to certain amendments
of the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement, subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement.
(a) Section 1.01 of the Credit Agreement shall be amended at the
defined term "Optional Currency" by amending and restating such defined term in
its entirety to read as follows:
"Optional Currency" means Australian Dollars, Canadian
Dollars, Deutsche Marks, euro (the single currency of
participating member states of the European Union), French
Francs, Japanese Yen, Pounds Sterling, Swiss Francs, and any
other lawful currency which is freely transferable and
convertible into Dollars selected by the Borrower and agreed to
by the Bank. The Bank may, from time to time, in its sole
discretion, advise the Borrower that a currency is no longer an
Optional Currency, including by reason of the introduction of the
euro.
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<PAGE> 2
(b) Article 7 of the Credit Agreement shall be amended by
inserting the following new Section 7.16 immediately following Section 7.15:
7.16 Year 2000. The Borrower has (a) initiated a review
and assessment of all areas within its and each of its
Subsidiaries' business and operations (including those affected
by customers and vendors) that could be adversely affected by the
"Year 2000 Problem" (that is, the risk that computer applications
and devices containing imbedded computer chips used by the
Borrower or any of its Subsidiaries (or their respective
customers and vendors) may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior
to and any date after December 31, 1999), (b) developed a plan
and timeline for addressing the Year 2000 Problem on a timely
basis, and (c) to date, implemented that plan in accordance with
that timetable. Based on the foregoing, the Borrower believes
that all computer applications and devices containing imbedded
computer chips (including those of its and its Subsidiaries'
customers and vendors) that are material to its or any of its
Subsidiaries' business and operations are reasonably expected on
a timely basis to be able to perform properly date-sensitive
functions for all dates before and after January 1, 2000, except
to the extent that a failure to do so could not reasonably be
expected to have a material adverse effect on the Borrower's
consolidated financial condition or results of operations or its
ability to perform its obligations hereunder or under any
instrument or agreement required hereunder.
(c) Section 8.04 of the Credit Agreement shall be amended in its
entirety to read as follows:
8.04 Tangible Net Worth. Maintain as of the last day of
any fiscal quarter (on a consolidated basis) Tangible Net Worth
during the period beginning on April 3, 1999, in an amount equal
to at least 85 percent of Tangible Net Worth as of April 2, 1999,
plus (a) 75 percent of net income after income taxes (without
subtracting losses) earned in each quarterly accounting period
commencing after April 2, 1999, plus (b) 100 percent of Equity
Proceeds, less (c) the lesser of (i) the amount of goodwill
directly related to the acquisition by the Borrower of Unified
Research Laboratories, Inc., and (ii) $50,000,000.
3. Representations and Warranties. The Borrower hereby represents and
warrants to the Bank as follows:
(a) No event which is or, with the lapse of time or notice or
both would be, an Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Borrower of
this Amendment have been duly authorized by all necessary corporate and other
action and do not and will not require any registration with, consent or
approval of, notice to or action by, any Person (including any governmental
authority) in order to be effective and enforceable. The Credit Agreement as
amended by this Amendment constitutes the legal, valid and binding obligations
of the Borrower, enforceable against it in accordance with its respective terms,
without defense,
- 2 -
<PAGE> 3
counterclaim or offset.
(c) All representations and warranties of the Borrower contained
in the Credit Agreement are true and correct.
(d) The Borrower is entering into this Amendment on the basis of
its own investigation and for its own reasons, without reliance upon the Bank or
any other Person.
4. Reservation of Rights. The Borrower acknowledges and agrees that the
execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to forbear or execute
similar amendments under the same or similar circumstances in the future.
5. Guarantor Acknowledgement and Consent. The Borrower, in its capacity
as a guarantor under any guaranty given to the Bank or an affiliate thereof
guaranteeing the obligations of any Borrowing Entities, acknowledges and
consents to the execution, delivery and performance hereof by the parties hereto
and reaffirms and agrees that any such guaranty is in full force and effect,
without defense, offset or counterclaim.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein and in the other Loan Documents to such Credit
Agreement shall henceforth refer to the Credit Agreement as amended by this
Amendment. This Amendment shall be deemed incorporated into, and a part of, the
Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit
of the parties hereto and thereto and their respective successors and assigns.
No third party beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the Bank of a
facsimile transmitted document purportedly bearing the signature of the Borrower
shall bind the Borrower with the same force and effect as the delivery of a hard
copy original. Any failure by the Bank to receive the hard copy executed
original of such document shall not diminish the binding effect of receipt of
the facsimile transmitted executed original of such document which hard copy
page was not received by the Bank.
(e) This Amendment, together with the Credit Agreement, contains
the entire and
- 3 -
<PAGE> 4
exclusive agreement of the parties hereto with reference to the matters
discussed herein and therein. This Amendment supersedes all prior drafts and
communications with respect thereto. This Amendment may not be amended except in
a writing signed by each of the parties.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
(g) The Borrower covenants to pay to or reimburse the Bank, upon
demand, for all costs and expenses (including allocated costs of in-house
counsel) incurred in connection with the development, preparation, negotiation,
execution and delivery of this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Amendment as of the date first above written.
SYMANTEC CORPORATION
By: /S/ Gregory Myers
--------------------
Name: Gregory E. Myers
--------------------
Title: CFO & VP, Finance
--------------------
BANK OF AMERICA, N.A., FORMERLY KNOWN AS
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /S/ Fred L. Thorne
--------------------
Name: Fred L. Thorne
--------------------
Title: Managing Director
--------------------
<PAGE> 1
EXHIBIT 10.03
LIMITED WAIVER AND AMENDMENT
THIS LIMITED WAIVER AND AMENDMENT, dated as of September 30, 1999 (this
"Waiver"), is entered into by and among SYMANTEC CORPORATION, a Delaware
corporation (together with its permitted successors and assigns, the "Company"),
as Lessee, Pledgor and Guarantor (together with its permitted successors and
assigns, the "Lessee"; in its capacity as Pledgor, the "Pledgor"; and in its
capacity as Guarantor, the "Guarantor"); SUMITOMO BANK LEASING AND FINANCE,
INC., a Delaware corporation, as Lessor (together with its successors in such
capacity, the "Lessor"); the various financial institutions as are or may from
time to time become Lenders under the Loan Agreement (together with their
respective permitted successors and assigns, the "Lenders"); THE BANK OF NOVA
SCOTIA, as Documentation Agent, and THE SUMITOMO BANK, LIMITED, LOS ANGELES
BRANCH, as Agent (in such capacity, the "Agent").
WHEREAS, the Lessee has requested that the Lessor and the Lenders agree
to certain amendments of the Participation Agreement.
WHEREAS, the Lenders and Lessor are willing to amend the Participation
Agreement, subject to the terms of this Agreement.
NOW THEREFORE, the parties hereto agree as follows:
Section 1. Definitions. Capitalized terms used but not otherwise defined
in this Waiver shall, unless the context otherwise requires, have the respective
meanings specified in Appendix A to the Amended and Restated Participation
Agreement dated as of February 9, 1999, among the Company, the Lessor, the
Lenders, Documentation Agent and the Agent (as amended, supplemented, amended
and restated or otherwise modified from time to time in accordance with the
provisions thereof, the "Participation Agreement"); and the rules of
interpretation set forth in such Appendix A shall apply to this Waiver.
Section 2. Waiver. Subject to compliance by the Company with the
provisions of Section 3 hereof, the Lessor and the Lenders hereby
(i) waive, during the period from the date hereof through
December 31, 1999 (the "Waiver Period"), compliance by the Company with the
provisions of Section 10.1(f)(ii) of the Participation Agreement, to the extent
that the Company would not be in compliance therewith as a result of the
Company's acquisition of Unified Research Laboratories Inc. ("UR Labs");
<PAGE> 2
provided that the waiver set forth in clause (i) above shall expire at the close
of business on December 31, 1999 and the existence of any Default or Event of
Default under the Lease shall thereafter be determined as if no such waiver had
been granted and provided further that this waiver shall be of no effect if at
any time during the Waiver Period the Company is not in compliance with Section
10.1(f)(ii) but excluding from the calculation thereof the effect of the
acquisition by the Company of UR Labs (which effect shall not adjust the
calculation by more than $45,000,000).
Section 3. Condition of Waiver. The waiver set forth in Section 2 is
conditioned upon the payment by the Lessee of a fee of $9,400.00.
Section 4. Conditions to Effectiveness. This Waiver shall become
effective, as of the date hereof, on the date on which each of the Company, and
the Required Participants shall have executed and delivered a counterpart
hereof.
Section 5. Representations and Warranties. In order to induce the
Lessor, the Lenders, the Documentation Agent and the Agent to enter into this
Waiver, the Company hereby represents and warrants unto the Lessor, the Lenders,
the Documentation Agent and the Agent as set forth in this Section 4:
(a) Validity, etc. This Waiver constitutes the legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, subject, as to enforceability, to bankruptcy, insolvency,
reorganization and other similar laws affecting enforcement of creditor rights
generally (insofar as any such law relates to the bankruptcy, insolvency,
reorganization or similar event of the Company), principles of good faith and
fair dealing and, as to the availability of specific performance or other
injunctive relief, the discretionary power of a court to deny such relief.
(b) No Event of Default. No Event of Default has occurred and is
continuing.
Section 6. Operative Document; Ratification of the Operative Documents.
This Waiver shall be deemed to be an Operative Document entered into in
connection with the Participation Agreement. Except as expressly set forth
herein, the terms, provisions and conditions of the Participation Agreement and
the other Operative Documents shall remain in full force and effect and are in
all respects hereby ratified and confirmed in each and every respect.
Section 7. Headings. The various headings of this Waiver are inserted
for convenience only and shall not affect the meaning or interpretation of this
Waiver or any provisions hereof.
<PAGE> 3
Section 8. Execution in Counterparts. This Waiver may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement.
Section 9. Governing Law; Entire Agreement. THIS WAIVER SHALL IN ALL
RESPECTS BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK (EXCLUDING ANY
CONFLICT-OF-LAW OR CHOICE-OF-LAW RULES WHICH MIGHT LEAD TO THE APPLICATION OF
THE INTERNAL LAWS OF ANY OTHER JURISDICTION) AS TO ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE. This Waiver and the other Operative Documents
constitute the entire understanding among the parties hereto with respect to the
subject matter hereof and supersede any prior agreements, written or oral, with
respect thereto.
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be
duly executed by their respective officers thereunto duly authorized as of the
day and year first above written.
SYMANTEC CORPORATION, as Lessee, Pledgor and
Guarantor
By /S/ Gregory Myers
-----------------
Name: Gregory E. Myers
Title: CFO & VP, Finance
SUMITOMO BANK LEASING AND FINANCE, INC.,
as Lessor
By /S/ David A. Ward
-----------------
Name: David A. Ward
Title: Managing Director
THE BANK OF NOVA SCOTIA, as Lender and
Documentation Agent
By /S/ Edward Kofman
-----------------
Name: Edward Kofman
Title: Relationship Manager
- 3 -
<PAGE> 4
COOPERATIEVE CENTRALE RAIFF EISEN-BOERENLEENBANK
B.A., "Rabobank Nederland," New York Branch
By /S/ Peter Fraenkel
------------------
Name: Peter Fraenkel
Title: Vice President
By /S/ Pieter Kodde
------------------
Name: Pieter Kodde
Title: SVP
THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as
Agent
By
------------------
Name:
Title:
- 4 -
<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 SIX MONTH PERIOD ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-03-1999
<PERIOD-END> OCT-01-1999
<CASH> 192,742
<SECURITIES> 17,517
<RECEIVABLES> 86,761
<ALLOWANCES> (5,249)
<INVENTORY> 6,451
<CURRENT-ASSETS> 337,985
<PP&E> 206,820
<DEPRECIATION> (150,741)
<TOTAL-ASSETS> 621,300
<CURRENT-LIABILITIES> 206,626
<BONDS> 0
0
0
<COMMON> 576
<OTHER-SE> 413,189
<TOTAL-LIABILITY-AND-EQUITY> 621,300
<SALES> 357,673
<TOTAL-REVENUES> 357,673
<CGS> 61,265
<TOTAL-COSTS> 61,265
<OTHER-EXPENSES> 236,614
<LOSS-PROVISION> 531
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 74,596
<INCOME-TAX> 25,037
<INCOME-CONTINUING> 49,559
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,559
<EPS-BASIC> 0.87
<EPS-DILUTED> 0.84
</TABLE>
