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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______.
COMMISSION FILE NUMBER 0-17781
- --------------------------------------------------------------------------------
SYMANTEC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0181864
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10201 TORRE AVENUE, CUPERTINO, CALIFORNIA 95014-2132
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 253-9600
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, including 2,118,392 shares of Delrina exchangeable
stock, as of October 30, 1998:
COMMON STOCK, PAR VALUE $0.01 PER SHARE 55,411,446 SHARES
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SYMANTEC CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED OCTOBER 2, 1998
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
as of September 30, 1998 and March 31, 1998................................................. 3
Consolidated Statements of Operations
for the three and six month periods ended September 30, 1998 and 1997....................... 4
Consolidated Statements of Cash Flow
for the six months ended September 30, 1998 and 1997........................................ 5
Notes to Consolidated Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................... 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 33
Item 2. Changes in Securities and Use of Proceeds............................................................ 33
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 33
Item 6. Exhibits and Reports on Form 8-K..................................................................... 34
Signatures ............................................................................................................ 36
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMANTEC CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
(In thousands) 1998 1998
- ------------------------------------------------------------------- ------------ ---------
(unaudited)
ASSETS
Current assets:
Cash and short-term investments $ 175,403 $ 225,883
Trade accounts receivable 67,191 65,158
Inventories 4,526 3,175
Deferred income taxes 23,842 19,677
Other 13,043 14,646
--------- ---------
Total current assets 284,005 328,539
Long-term investments 32,009 34,258
Restricted investments 67,036 59,370
Equipment and leasehold improvements 51,992 50,030
Capitalized software 26,578 1,470
Other 6,316 2,793
--------- ---------
$ 467,936 $ 476,460
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,008 $ 34,171
Accrued compensation and benefits 19,563 21,332
Other accrued expenses 99,120 64,532
Income taxes payable 9,855 24,634
Current portion of convertible subordinated debentures 8,333 8,333
--------- ---------
Total current liabilities 175,879 153,002
Convertible subordinated debentures and other 5,951 5,951
Long-term obligations 5,455 --
--------- ---------
Total long-term liabilities 11,406 5,951
Commitments and contingencies
Stockholders' equity:
Preferred stock (authorized: 1,000; issued and outstanding: none) -- --
Common stock (authorized: 100,000; issued and outstanding: 56,307
and 57,109 shares) 563 571
Capital in excess of par value 301,220 310,949
Notes receivable from stockholders (144) (144)
Retained earnings (deficit) (2,776) 18,690
Accumulated other comprehensive income (loss) (18,212) (12,559)
--------- ---------
Total stockholders' equity 280,651 317,507
--------- ---------
$ 467,936 $ 476,460
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------- ---------------------------
(In thousands, except per share data; unaudited) 1998 1997 1998 1997
- ------------------------------------------------ --------- --------- --------- ---------
Net revenues $ 140,061 $ 139,013 $ 293,152 $ 274,029
Cost of revenues 21,485 22,389 41,817 43,309
--------- --------- --------- ---------
Gross margin 118,576 116,624 251,335 230,720
Operating expenses:
Research and development 25,757 23,591 50,736 45,172
Sales and marketing 70,561 61,279 140,404 122,934
General and administrative 10,272 9,024 19,453 18,058
Acquired in-process research and development 5,017 -- 34,290 --
Litigation judgment -- -- 5,825 --
Restructuring and other expenses 5,105 -- 5,105 --
--------- --------- --------- ---------
Total operating expenses 116,712 93,894 255,813 186,164
--------- --------- --------- ---------
Operating income (loss) 1,864 22,730 (4,478) 44,556
Interest income 3,992 3,261 8,481 6,168
Interest expense (320) (322) (651) (579)
Other income (expense), net (522) 1,058 2,080 654
--------- --------- --------- ---------
Income before income taxes 5,014 26,727 5,432 50,799
Provision for income taxes 2,708 6,147 8,439 11,684
--------- --------- --------- ---------
Net income (loss) $ 2,306 $ 20,580 $ (3,007) $ 39,115
========= ========= ========= =========
Net income (loss) per share - basic $ 0.04 $ 0.37 $ (0.05) $ 0.70
========= ========= ========= =========
Net income (loss) per share - diluted $ 0.04 $ 0.35 $ (0.05) $ 0.67
========= ========= ========= =========
Shares used to compute net income
(loss) per share - basic 57,071 55,938 57,246 55,698
========= ========= ========= =========
Shares used to compute net income
(loss) per share - diluted 58,762 60,008 57,246 59,192
========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Six Months Ended
September 30,
---------------------------
(In thousands; unaudited) 1998 1997
- ------------------------- --------- ---------
Operating Activities:
Net income (loss) $ (3,007) $ 39,115
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization of equipment and
leasehold improvements 12,427 12,602
Amortization and write-off of capitalized software development costs 2,186 687
Amortization of goodwill 197 --
Write-off of acquired in-process research and development 34,290 --
Write-off of equipment and leasehold improvements 6 1,092
Deferred income taxes (4,254) 62
Net change in assets and liabilities, excluding effects of
acquisitions:
Trade accounts receivable 584 (8,470)
Inventories (1,072) 2,043
Other current assets 3,150 (308)
Capitalized software development costs -- (6)
Other assets 165 (581)
Accounts payable 3,528 1,688
Accrued compensation and benefits (1,912) 4,728
Other accrued expenses 10,704 5,856
Income taxes payable (14,465) 5,276
--------- ---------
Net cash provided by operating activities 42,527 63,784
--------- ---------
Investing Activities:
Capital expenditures (13,362) (14,372)
Purchased intangibles (2,376) (481)
Purchase of certain assets from IBM (8,000) --
Purchase of certain assets from Binary Research Limited (27,500) --
Purchases of marketable securities (122,070) (120,539)
Proceeds from sales of marketable securities 118,101 81,580
Purchases of long-term, restricted investments (7,666) (4,091)
--------- ---------
Net cash used in investing activities (62,873) (57,903)
--------- ---------
Financing Activities:
Repurchase of common stock (39,834) (8,373)
Net proceeds from sales of common stock and other 11,248 14,969
--------- ---------
Net cash provided by (used in) financing activities (28,586) 6,596
--------- ---------
Effect of exchange rate fluctuations on cash and cash equivalents (7,766) (1,643)
Increase (decrease) in cash and cash equivalents (56,698) 10,834
Beginning cash and cash equivalents 139,013 95,758
--------- ---------
Ending cash and cash equivalents $ 82,315 $ 106,592
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements of Symantec Corporation ("Symantec" or the
"Company") as of September 30, 1998 and for the three and six month periods
ended September 30, 1998 and 1997 are unaudited and, in the opinion of
management, contain all adjustments, consisting of only normal recurring items
necessary for the fair presentation of the financial position and results of
operations for the interim periods. These consolidated financial statements
should be read in conjunction with the Consolidated Financial Statements and
notes thereto included in Symantec's Annual Report on Form 10-K for the year
ended March 31, 1998. The results of operations for the three and six month
periods ended September 30, 1998 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.
During the September 1998 quarter, the Company acquired certain assets of Intel
Corporation ("Intel") (See Note 8 of Notes to Consolidated Financial Statements
in this Form 10-Q). During the June 1998 quarter, the Company acquired certain
assets of International Business Machines ("IBM") and Binary Research Limited
("Binary") (See Note 8 of Notes to Consolidated Financial Statements in this
Form 10-Q). The results of operations from these have been included in
Symantec's results of operations since the date of acquisition.
In October 1997 and March 1998, the Accounting Standards Executive Committee
("AcSEC") issued Statements of Position ("SOP") 97-2, "Software Revenue
Recognition," and SOP 98-4, "Deferral of the Effective Date of a Provision of
SOP 97-2, Software Revenue Recognition," respectively, which provide guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions and were effective for Symantec beginning with the June
30, 1998 quarter. AcSEC issued an exposure draft in July 1998 regarding the
permanent deferral of certain provisions of SOP 97-2. At AcSEC's October 27,
1998 meeting, the exposure draft was not approved. AcSEC approved, instead, a
revised version of the SOP, which must still be cleared by the FASB. The Company
will continue to address the revised SOP and any further developments and their
impact on the Company's net revenues and results of operations.
Symantec has a 52/53-week fiscal accounting year. Accordingly, all references as
of and for the periods ended September 30, 1998, March 31, 1998 and September
30, 1997 reflect amounts as of and for the periods ended October 2, 1998, April
3, 1998 and October 3, 1997, respectively. The six months ended September 30,
1998 comprised 26 weeks of revenue and expense activity, while the comparable
prior year period comprised 27 weeks.
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. BALANCE SHEET INFORMATION
September 30, March 31,
(In thousands) 1998 1998
- -------------- ------------- ---------
(unaudited)
Cash, cash equivalents and short-term investments:
Cash $ 43,989 $ 28,236
Cash equivalents 38,326 110,777
Short-term investments 93,088 86,870
--------- ---------
$ 175,403 $ 225,883
========= =========
Trade accounts receivable:
Receivables $ 71,809 $ 69,574
Less: allowance for doubtful accounts (4,618) (4,416)
--------- ---------
$ 67,191 $ 65,158
========= =========
Inventories:
Raw materials $ 1,761 $ 1,091
Finished goods 2,765 2,084
--------- ---------
$ 4,526 $ 3,175
========= =========
Equipment and leasehold improvements:
Computer hardware and software $ 118,662 $ 107,724
Office furniture and equipment 31,962 29,407
Leasehold improvements 22,419 21,038
--------- ---------
173,043 158,169
Less: accumulated depreciation and amortization (121,051) (108,139)
--------- ---------
$ 51,992 $ 50,030
========= =========
Capitalized software:
Purchased product rights and technologies $ 28,651 $ 1,358
Capitalized software development costs 2,357 2,414
Less: accumulated amortization of purchased product rights and technologies (2,380) (563)
Less: accumulated amortization of capitalized software development costs (2,050) (1,739)
--------- ---------
$ 26,578 $ 1,470
========= =========
Other assets:
Goodwill, net $ 2,753 $ --
Other 3,563 2,793
--------- ---------
$ 6,316 $ 2,793
========= =========
Other accrued expenses:
Deferred revenue $ 32,107 $ 25,537
Marketing development funds 12,346 12,815
Current obligations related to purchase of certain assets of Intel 15,070 --
Other 39,597 26,180
--------- ---------
$ 99,120 $ 64,532
========= =========
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale investments $ (233) $ 157
Cumulative translation adjustment (17,979) (12,716)
--------- ---------
$ (18,212) $ (12,559)
========= =========
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3. NET INCOME (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," which was required to be adopted by Symantec for the
fiscal period ending December 31, 1997. As a result, the Company has changed the
method used to compute earnings per share and has restated all prior periods.
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ -------------------------
(In thousands, except per share data; unaudited) 1998 1997 1998 1997
- ------------------------------------------------- -------- -------- -------- --------
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) $ 2,306 $ 20,580 $ (3,007) $ 39,115
======== ======== ======== ========
Weighted average number of common
shares outstanding during the period 57,071 55,938 57,246 55,698
======== ======== ======== ========
Basic net income (loss) per share $ 0.04 $ 0.37 $ (0.05) $ 0.70
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) $ 2,306 $ 20,580 $ (3,007) $ 39,115
Interest on convertible subordinated
debentures, net of income tax effect -- 177 -- 354
-------- -------- -------- --------
Net income (loss), as adjusted $ 2,306 $ 20,757 $ (3,007) $ 39,469
======== ======== ======== ========
Weighted average number of common
shares outstanding during the period 57,071 55,938 57,246 55,698
Shares issuable from assumed exercise
of options 1,691 2,820 -- 2,244
Shares issuable from assumed conversion
of convertible subordinated debentures -- 1,250 -- 1,250
-------- -------- -------- --------
Total shares for purpose of calculating
diluted net income (loss) per share 58,762 60,008 57,246 59,192
======== ======== ======== ========
Diluted net income (loss) per share $ 0.04 $ 0.35 $ (0.05) $ 0.67
======== ======== ======== ========
For the three months ended September 30, 1998, 1,190,000 shares issuable upon
conversion of convertible subordinated debentures and $169,000 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 conversion of convertible
subordinated debentures, options to purchase 2,175,000 shares and $338,000 of
interest expense were excluded from the computation of diluted net loss per
share because the effect would have been anti-dilutive.
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 4. RESTRUCTURING AND OTHER EXPENSES
Restructuring and other expenses consisted of the following:
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
(In thousands; unaudited) 1998 1997 1998 1997
- ------------------------------------- ------ ---- ------ ---
Personnel severance $3,800 $-- $3,800 $--
Planned abandonment of manufacturing
facility lease 1,305 -- 1,305 --
------ --- ------ ---
Total restructuring and other expenses $5,105 $-- $5,105 $--
====== === ====== ===
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, 1998, $1.2 million of the $5.1 million has
been incurred. These activities will be substantially complete by the end of
fiscal 1999.
As of September 30, 1998, total accrued acquisition, restructuring and other
expenses were approximately $6.2 million and include approximately $1.8 million
for the elimination of duplicative and excess facilities, $2.5 million for
personnel severance and $1.9 million for other expenses.
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 5. COMPREHENSIVE INCOME (LOSS)
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
beginning with the quarter ended June 30, 1998. SFAS No. 130 establishes new
rules for the reporting and disclosure of comprehensive income and its
components; however, it has no impact on net income (loss) or stockholders'
equity. The components of comprehensive income (loss), net of tax, are as
follows:
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
(In thousands; unaudited) 1998 1997 1998 1997
- ---------------------------------------------------------------- -------- -------- -------- --------
Net income (loss) $ 2,306 $ 20,580 $ (3,007) $ 39,115
Other comprehensive income (loss):
Add: change in unrealized gain (loss) on
available-for-sale investments,
net of a tax provision (benefit) of ($109),
$26, ($125), and $30 (232) 88 (265) 101
Less: reclassification adjustment for gains
(losses) included in net income (loss),
net of a tax provision (benefit) of $63, $0,
$146 and $0 133 -- 310 --
Add: change in cumulative translation
adjustment ("CTA"), net of a tax
benefit of ($420), ($474), ($1,684),
and ($486) (895) (1,586) (3,579) (1,627)
Less: reclassification adjustment for CTA
included in net income (loss),
net of a tax provision of $0,
$0, $604, and $0 -- -- 1,284 --
-------- -------- -------- --------
Total other comprehensive loss (1,260) (1,498) (5,438) (1,526)
-------- -------- -------- --------
Comprehensive income (loss) $ 1,046 $ 19,082 $ (8,445) $ 37,589
======== ======== ======== ========
NOTE 6. LITIGATION AND CONTINGENCIES
On March 18, 1996, a class action complaint was filed by the law firm of
Milberg, Weiss, Bershad, Hynes & Lerach in Superior Court of the State of
California, County of Santa Clara, against the Company and several of its
current and former officers and directors. The complaint alleges that Symantec
insiders inflated the stock price and then sold stock based on inside
information that sales were not going to meet analysts' expectations. The
complaint seeks damages in an unspecified amount. The complaint has been refiled
twice in state court, most recently on January 13, 1997, following Symantec's
demurrers directed to previous complaints. The parties are currently conducting
discovery. 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 is currently pending. Symantec believes that neither the state court
complaint nor the federal court complaint has any merit and will vigorously
defend itself against both complaints.
On April 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
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 owned by
Hilgraeve. The lawsuit requests damages, injunctive relief and costs and
attorney fees. Symantec believes this claim has no merit and intends to defend
the action vigorously.
On February 4, 1998, CyberMedia, Inc. ("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 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. Symantec
believes it has meritorious defenses to this claim and intends to defend the
action vigorously.
On February 19, 1998, a class action complaint was filed by the Milberg, Weiss,
Bershad, Hynes & Lerach law firm 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 original complaint purports 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(R) to function properly after
the year 2000. The complaint seeks unspecified damages and injunctive relief.
Symantec believes that these actions have no merit and intends to defend itself
vigorously.
In connection with the May 1998 asset purchase agreement with IBM (see Note 8 of
Notes to Consolidated Financial Statements in this Form 10-Q), claims of patent
infringement previously asserted by IBM with respect to certain of the Company's
products were resolved. The terms of resolution were not material to Symantec.
In July 1998, the Ontario Court of Justice (General Division) ruled that
Symantec should pay $5.8 million plus 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
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
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 7. STOCK REPURCHASE
On June 9, 1998, the Board of Directors of Symantec authorized the repurchase of
up to 5% of Symantec's outstanding common stock before December 31, 1998. Among
other purposes, the shares will be used for employee stock purchase programs and
option grants. The Company did not repurchase any shares during the June 1998
quarter. The Company repurchased 1.7 million shares at prices ranging from
$17.13 to $27.21, for an aggregate amount of $39.8 million, during the September
1998 quarter. Of the $39.8 million, approximately $18.5 million was charged to
retained earnings after appropriate amounts were deducted from common stock and
capital in excess of par. Subsequent to September 30, 1998 and through October
30, 1998, the Company completed the repurchase and has now repurchased a total
of 2.875 million shares at prices ranging from $13.10 to $27.21, for an
aggregate amount of approximately $56.3 million.
NOTE 8. PURCHASE OF CERTAIN ASSETS
On May 19, 1998, IBM and Symantec entered into an agreement whereby Symantec
licensed IBM's immune system technology for $16.0 million plus certain potential
future royalties. Symantec also 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. Symantec assumed
liabilities of $3.0 million and incurred additional expenses of approximately
$1.3 million as part of the transaction. As of September 30, 1998, Symantec paid
IBM $8.0 million in cash with the remaining $8.0 million payable in two equal
installments in August 1999 and November 1999. As part of the agreement, IBM
assigned its existing anti-virus customer and OEM contracts to Symantec. Under
the transaction, Symantec recorded approximately $16.0 million for in-process
research and development acquired from IBM, $3.0 million for goodwill and $1.3
million for certain prepaid research and development and other assets. The
amount of in-process research and development acquired from IBM was established
by an independent valuation specialist based on management's estimates. Symantec
also entered into a contract research and development arrangement with IBM to
develop certain products in return for payments totaling $4.0 million, which has
been completed as of September 30, 1998.
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On June 24, 1998, Symantec entered into an agreement whereby Symantec purchased
certain assets of Binary, an Auckland, New Zealand based company, for $27.5
million. Symantec also incurred $0.7 million of acquisition related costs. The
transaction was accounted for as a purchase. Under the transaction, Symantec
recorded approximately $13.3 million for in-process research and development
acquired from Binary and $14.2 million for capitalized software technology, with
the remainder of the purchase price allocated to net tangible and intangible
assets. The amount of in-process research and development acquired from Binary
was established by an independent valuation specialist based on management's
estimates. The capitalized software is being amortized over a 3-year period. As
of September 30, 1998, the Company incurred approximately $1.6 million of
amortization expense related to this asset.
The following unaudited pro forma results of operations for the three and six
month periods ended September 30, 1998 and 1997 are as if the acquisition of
Binary had occurred at the beginning of each period presented. The pro forma
information excludes approximately $1.2 million of capitalized software
amortization and the tax effect of the charge for the three months ended
September 30, 1998. The pro forma information excludes the one-time write-off of
$13.3 million of in-process research and development and the tax effect of the
charge and $1.6 million of capitalized software amortization and its tax effect
for the six month period ended September 30, 1998. 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.
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
(In thousands, except per share data; unaudited) 1998 1997 1998 1997
- ------------------------------------------------- --------------------------------- ---------------------------------
Net revenues $ 140,061 $ 141,989 $ 296,240 $ 278,485
============= ============= ============= =============
Net income $ 3,130 $ 21,562 $ 11,013 $ 40,961
============= ============= ============= =============
Basic net income per share $ 0.05 $ 0.39 $ 0.19 $ 0.74
============= ============= ============= =============
Diluted net income per share $ 0.05 $ 0.36 $ 0.19 $ 0.70
============= ============= ============= =============
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 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 will
continue to support its anti-virus customers and will transition support to
Symantec by June 1999. In addition, Intel will promote Norton Antivirus through
its worldwide reseller channels. Subsequent to September 30, 1998 and through
October 30, 1998, Symantec has paid approximately $11.9 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 amount
of in-process research and development acquired from Intel was established by an
independent valuation specialist based on management's estimates. The
capitalized software is being amortized over a 5-year period. As of September
30, 1998, the Company has not yet recorded amortization expense related to
capitalized software.
13
14
SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 9. SUPPLEMENTAL CASH FLOWS INFORMATION
Six Months Ended
September 30,
(In thousands; unaudited) 1998
----------------
Binary Research Limited
Fair value of assets acquired $27,500
=======
Cash paid $27,500
=======
IBM Immune System Technology and Other Assets
Fair value of assets acquired $20,250
=======
Expenses incurred $ 1,250
Liabilities assumed $ 3,000
Current obligation $ 4,000
Long-term obligation $ 4,000
Cash paid $ 8,000
-------
Total $20,250
=======
Intel Corporation Anti-Virus Business
Fair value of assets acquired $16,525
=======
Current obligations $15,070
Long-term obligations $ 1,455
-------
Total $16,525
=======
NOTE 10. ADOPTION OF STOCKHOLDER RIGHTS PLAN
On August 11, 1998, Symantec's Board of Directors adopted a stockholder rights
plan designed to ensure orderly consideration of any future unsolicited
acquisition attempt to ensure fair value of the Company for its stockholders.
In connection with the plan, the Board declared a dividend of one preferred
share purchase right for each share of the company's common stock outstanding on
August 21, 1998 (the "Record Date"). The Board further directed the issuance of
one such right with respect to each share of the Company's common stock that is
issued after the Record Date, except in certain circumstances. The rights will
expire on August 12, 2008.
The rights are initially attached to the Company's common stock and will not
trade separately. If a person or a group (an "Acquiring Person") acquires 20% or
more of the Company's common stock, or announces an intention to make a tender
offer for 20% or more of the Company's common stock, the rights will be
distributed and will thereafter trade separately from the common stock. Each
right will be exercisable for 1/1000th of a share of a newly designated Series A
Junior Participating Preferred Stock at an exercise price of $150.00. The
preferred stock has been structured so that the value of 1/1000th of a share of
such preferred stock will approximate the value of one share of common stock.
Upon a person becoming an Acquiring Person, holders of the rights (other than
the Acquiring Person) will have the right to acquire shares of the company's
common stock at a substantially discounted price.
If a person becomes an Acquiring Person and the company is acquired in a merger
or other business combination, or 50% or more of its assets are sold to an
Acquiring Person, the holder of rights (other than the Acquiring Person) will
have the right to receive shares of common stock of the acquiring corporation at
a substantially discounted price. After a person has become an Acquiring Person,
the Company's Board of Directors may, at its option, require the
14
15
SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
exchange of outstanding rights (other than those held by the Acquiring Person)
for common stock at an exchange ratio of one share of the company's common stock
per right.
The Board may redeem outstanding rights at any time prior to a person becoming
an Acquiring Person at a price of $0.001 per right. Prior to such time, the
terms of the rights may be amended by the Board. In addition, the Board also
amended the Company's bylaws to: permit only the Chairman, President or the
Board to call a special meeting of the stockholders; require that the Board be
given prior notice of a stockholder proposal to take action by written consent
so that a record date for such action can be established; require advance notice
to the Board of stockholder-sponsored proposals for consideration at annual
meetings and for stockholder nominations for the election of directors; permit
the Board to meet on one- rather than two-day advance notice; and conform the
bylaws to applicable provisions of Delaware law regarding the inspection of
elections at stockholder meetings.
NOTE 11. LEASED BUILDINGS
In fiscal 1997, Symantec entered into lease agreements for two existing office
buildings (Cupertino City Center One or "CCC1" and World Head Quarters or
"WHQ"), one parcel of land and one office building under construction (Cupertino
City Center Five or "CCC5") in Cupertino, California. In connection with these
leases, the Company is required 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 operating
cash requirements.
On September 22, 1998, an agreement was entered into, subject to certain closing
conditions that have not yet been met, whereby the landlord intends to exchange
CCC5 for another leased building (Cupertino City Center Two or "CCC2") both
located in Cupertino, California. If this transaction is consummated, Symantec
would move both personnel and equipment into CCC2 once certain tenant
improvements are completed. In conjunction, Symantec would be relieved of
responsibility for its lease of WHQ.
As of November 13, 1998, the parties are conducting due diligence which is
scheduled to end on November 20, 1998. During this period, either party may
decide not to go forward with the deal at such party's sole discretion without
penalty.
NOTE 12. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued 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. SFAS 133 will be effective for Symantec
at the beginning of the June 2000 quarter for both annual and interim reporting
periods. Symantec is evaluating the potential impact of this accounting
pronouncement on required disclosures and accounting practices.
NOTE 13. SUBSEQUENT EVENT
On October 15, 1998, Symantec announced it signed a definitive merger agreement
to acquire Quarterdeck Corporation. Under the terms of the agreement, Symantec
has commenced a cash tender offer for all outstanding shares of Quarterdeck
common stock at a price of $0.52 per share. The aggregate purchase price to be
allocated to acquired assets and liabilities is expected to be approximately
$70 to $75 million which includes common stock and equivalents, acquisition
related costs and any negative tangible net worth at the time of closing, if
the tender offer is accepted. The Boards of Directors of both companies have
approved the transaction.
15
16
SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Completion of the tender offer is subject to certain conditions, including the
tender of a majority of the Quarterdeck shares, receipt of government approvals
and the expiration of applicable waiting periods under the Hart-Scott-Rodino
Act. Effective as of November 3, 1998, the Department of Justice has granted
early termination of the waiting period under the Hart-Scott-Rodino Act,
allowing Symantec to proceed with its acquisition of Quarterdeck Corporation.
Quarterdeck's revenue for the twelve months ended June 1998 was approximately
$57.0 million. (See Agreement and Plan of Merger, dated October 15, 1998, among
Symantec, Purchaser, and Quarterdeck Corporation filed with Symantec's Form SC
14D1 on October 19, 1998).
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended. These forward-looking statements
are subject to significant risks and uncertainties, including those identified
in the section "Factors That May Affect Future Results" and in the Company's
annual report on Form 10-K for the year ended March 31, 1998, that may cause
actual results to differ materially from those discussed in such forward-looking
statements. The forward-looking statements within this Form 10-Q are typically
identified by words such as "believes," "anticipates," "expects," "intends,"
"may" and other similar expressions, and include the statements of future
estimates under "Year 2000 - Product Liability" and "Year 2000 - Corporate
Systems" below. However, these words are not the exclusive means of identifying
such statements. In addition, any statements which refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements which
may be made to reflect events or circumstances occurring subsequent to the
filing of this Form 10-Q with the Securities and Exchange Commission. Readers
are urged to carefully review and consider the various disclosures made by the
Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission, including its Form 10-K, that attempt to
advise interested parties of the risks and factors that may affect the Company's
business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND STOCK PRICE. Due to the factors
noted below, the Company's earnings and stock price have been and may continue
to be subject to significant volatility, particularly on a quarterly basis.
Symantec has previously experienced shortfalls in revenue and earnings from
levels expected by securities analysts and investors, which has had an immediate
and significant adverse affect on the trading price of the Company's common
stock. This may occur again in the future.
RAPID TECHNOLOGICAL CHANGE AND DEVELOPMENT RISKS. The Company participates in a
highly dynamic industry characterized by rapid change and uncertainty related to
new and emerging technologies and markets. The recent trend toward server-based
applications in networks and applications distributed over the Internet could
have a material adverse affect on sales of the Company's products. Future
technology or market changes may cause certain of Symantec's products to become
obsolete more quickly than expected.
The use of a Web browser (running on either a PC or network computer) to access
client/server systems is emerging as an alternative to the traditional desktop
access through operating systems which are resident on personal computers.
Should the functionality associated with such system access reduce the need for
Symantec's products, the Company's future net revenues and operating results may
be adversely affected.
OPERATING SYSTEM. The release and subsequent customer acceptance of current or
enhanced operating systems are particularly important events that increase the
uncertainty and volatility of Symantec's results. Should the Company be unable
to successfully and timely develop products that operate under existing or new
operating systems, or should pending or actual release of the new operating
systems delay the purchase of Symantec's products, the Company's future net
revenues and operating results would be materially adversely affected.
Microsoft has incorporated advanced utilities including telecommunications,
facsimile and data recovery utilities in Windows 95 and has included additional
product features in Windows 98, including enhanced disk repair, defragmentation,
system file maintenance, ISDN support and PPTP virtual private networking, that
may decrease the demand for certain of the Company's products, including those
currently under development. Fax capabilities were dropped from Windows 98.
Microsoft may also include additional features in new versions of Windows 2000
(formerly known as Windows NT 5.0) that could decrease demand for certain of the
Company's products intended for Windows 2000, including those currently under
development.
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Additionally, as hardware vendors incorporate additional server-based network
management and security tools into network operating systems, the demand may
decrease for certain of the Company's products, including those currently under
development. In addition, functionality previously provided only by software may
be incorporated directly into hardware, potentially reducing demand for
Symantec's products. Also, Symantec's competitors may license certain of their
products to Microsoft and OEMs for inclusion with their operating systems,
add-on products or hardware, which may also reduce the demand for certain of the
Company's products.
PERSONAL COMPUTERS, HARDWARE AND MICROSOFT WINDOWS 98. Fluctuations in customer
spending from software to hardware as the result of technological advancements
in hardware or price reductions of hardware have in the past, and may in the
future, result in reduced revenues which have had and would have a material
adverse affect on operating results.
Microsoft's Windows 98 operating system was introduced during the June 1998
quarter. The Company's ability to generate revenue from many of its current
products, and products currently under development, could be less than
anticipated in future periods due to reported incompatibilities by end-users,
and delays in the purchase of Symantec's products as end-users first deploy
Windows 98. The Company believes that weak retail software sales during the June
and September 1998 quarters compared to the March 1998 quarter were due, in
part, to the release of Windows 98 at the end of the June 1998 quarter. This
weakness could continue. In addition, the Company may face declining sales
following Microsoft's introduction of Windows 2000 (formally known as Windows NT
5.0) currently scheduled for 1999.
Symantec's stock price declined significantly within approximately 6 months
after the releases of Windows 3.1 and Windows 95, which in some cases also
caused the additional requirement for hardware upgrades. While there were a
variety of reasons for these declines in the stock price, Symantec's recent
stock price decline may have been due, in part, to the release of Windows 98.
Symantec could face additional stock price declines following the introduction
of Windows 2000 by Microsoft.
CONSOLIDATION IN THE INDUSTRY. Consolidation in the software industry continues
to occur, with competing companies merging or acquiring other companies, in
order to capture market share or expand product lines. As this consolidation
occurs, the nature of the market may change as a result of fewer players
dominating particular markets, potentially providing consumers with fewer
choices. Also, certain of these companies offer a broader range of products,
ranging from desktop to enterprise solutions, than Symantec, and Symantec may
not be able to compete effectively against certain competitors. Any or all of
these changes may have a significant adverse affect on Symantec's future
revenues and operating results.
DEPENDENCE ON THE INTERNET. 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 support the
functionality of certain of the Company's products, or to distribute software.
Should the Company be unable to incorporate changes in the Internet environment
into its business operations and product development successfully or in a timely
manner, the Company's future net revenues and operating results could be
adversely affected.
PRICE COMPETITION. Price competition is often intense in the microcomputer
software market, especially in regards to utility and anti-virus products, and
may continue to increase and become even more significant in the future,
resulting in reduced profit margins. Should competitive pressures in the
industry continue to increase in regards to utility and anti-virus products,
Symantec may be required to reduce prices and/or increase its spending on sales,
marketing and research and development of these products as a percentage of net
revenues, resulting in lower profit margins. These actions may not be sufficient
to offset the impact of price competition as it has done in the past, on the
Company's business and net revenues, resulting in adverse impacts on revenue,
income and cash flow.
Many of the Company's competitors have significantly reduced the price of
utility and anti-virus products. These practices may have a material adverse
impact on revenue in future periods.
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
The Company has raised prices on some of its products in the past and may do so
in the future. These actions, however, may not have a positive impact on the
Company's net revenues, income and cash flow.
INTEGRATED SUITES. Symantec and its competitors are now providing integrated
suites of utility products. With the shift to integrated utility suites, price
competition is likely to be intense, and cannibalization of Symantec's existing
utility and anti-virus products may occur. The price of integrated utility
suites is significantly less than the total price of individual products
included in these utility suites when such products are sold separately. As a
result, there may be a negative impact to Symantec's revenue and operating
income from selling integrated utility suites rather than individual products,
as the lower price of integrated utility suites may not be offset by increases
in the total volume of utility suites sold. Additionally, the Company's products
may not compete effectively with competitors' products or integrated utility
suites introduced in the future.
QUARTERLY BUYING PATTERNS; ABSENCE OF BACKLOG. Most retail customers tend to
make a majority of their purchases at the end of the fiscal quarter, in part
because they are able, or believe that they are able, to negotiate lower prices
and more favorable terms. This is also true of corporate customers that
negotiate site licenses near the end of each quarter. This end-of-period buying
pattern means that forecasts of quarterly and annual financial results are
particularly vulnerable to the risk that they will not be achieved, either
because expected sales do not occur or because they occur at lower prices or on
less favorable terms to the Company.
In recent quarters, the Company has noted that a growing proportion of revenues
are generated during the last month of the quarter. The reliance on a large
proportion of revenue occurring at the end of the quarter and an increase in the
dollar value of transactions that occur at the end of the quarter result in
increased uncertainty relating to quarterly revenues, and increase the chances
that the Company's results could diverge from the expectations of investors and
analysts.
The Company operates with relatively little backlog; therefore, if near-term
demand for the Company's products weakens in a given quarter, there could be an
immediate, material adverse effect on net revenues and on the Company's
operating results, which would likely result in a significant and precipitous
drop in the Company's stock price.
RETAIL DISTRIBUTION CHANNEL. A large portion of the Company's sales are made
through the retail distribution channel, which is subject to events that create
unpredictable fluctuations in consumer demand. Sales through the distribution
channel declined unexpectedly during the first six months of fiscal 1999 and had
an adverse effect on the Company's results of operations for that period. The
Company's retail distribution customers also carry the products of Symantec's
competitors. These retail distributors may have limited capital to invest in
inventory, and their decisions to purchase the Company's products is partly a
function of pricing, terms and special promotions offered by Symantec, as well
as by its competitors over which the Company has no control and which it cannot
predict.
Agreements with distributors are generally nonexclusive and may be terminated by
either party without cause. Certain distributors and resellers have experienced
financial difficulties in the past. Distributors that account for significant
sales of the Company may experience financial difficulties in the future, which
could lead to reduced sales or write-offs and could adversely affect operating
results of the Company. When this has occurred in the past, the Company has
successfully moved these inventories to other distributors. The Company may not
be able to do so in the future.
NEW DISTRIBUTION CHANNELS. Symantec may not be able to develop an effective
method of distributing its software products utilizing each of the rapidly
evolving software distribution channels, including the Internet. The presence of
new channels could adversely impact existing channels and/or product pricing,
which could have a material adverse impact on the Company's future revenues and
profitability. Symantec currently offers a broad range of products and services
over the Internet.
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
SITE LICENSES. Symantec sells volume license programs (corporate site licenses)
through the distribution channel and through corporate resellers. Average site
license revenue per unit is typically lower than the average revenue per unit
from retail versions shipped through the retail distribution channel.
RELIANCE ON JOINT BUSINESS ARRANGEMENTS. Symantec has entered into various
development or joint business arrangements for the purpose of: developing new
software products and enhancements to existing software products; gaining
presence in new markets, and Symantec may continue to do so in the future.
Depending on the nature of each such arrangement, the development, distribution,
sale or marketing of the resulting product may be controlled either by Symantec
or its business partner. Products resulting from joint business arrangements may
not be technologically successful, may not achieve market acceptance and may not
be able to compete with products either currently in the market or introduced in
the future.
Symantec distributes certain of its products through value-added resellers
("VARs") and independent software vendors ("ISVs") whereby Symantec's products
are included with hardware products prior to sale through retail channels. These
licensing agreements are generally non-exclusive and do not require the VAR or
ISV to make minimum purchases. If the Company is not successful in maintaining
its current relationships and securing license agreements with additional VARs
and ISVs, or if the Company's VAR and ISV customers are not successful in
selling their products, the Company's future net revenues and operating results
may be adversely affected.
ACQUISITIONS. Symantec has completed a number of acquisitions and may acquire
other companies and technology in the future. Acquisitions involve a number of
special risks, including the diversion of management's attention to integrate
the operations and personnel of the acquired companies in an efficient and
timely manner, the retention of key employees, the burden of presenting a
unified corporate image, the integration of acquired products and of research
and development and sales efforts. In addition, because the employees of
acquired companies have frequently remained in their existing, geographically
diverse locations, the Company has not achieved certain economies of scale that
might otherwise have been realized.
On October 15, 1998, Symantec announced it signed a definitive merger agreement
to acquire Quarterdeck Corporation. Under the terms of the agreement, Symantec
will commence a cash tender offer for all outstanding shares of Quarterdeck
common stock at a price of $0.52 per share. The aggregate purchase price to be
allocated to acquired assets and liabilities is expected to be approximately $70
to $75 million which includes common stock and equivalents, acquisition related
costs and any negative tangible net worth at the time of closing, if the tender
offer is accepted. The Boards of Directors of both companies have approved the
transaction. Completion of the tender offer is subject to certain conditions,
including the tender of a majority of the Quarterdeck shares, receipt of
government approvals and the expiration of applicable waiting periods under the
Hart-Scott-Rodino Act. Effective as of November 3, 1998, the Department of
Justice has granted early termination of the waiting period under the
Hart-Scott-Rodino Act, allowing Symantec to proceed with its acquisition of
Quarterdeck Corporation. Quarterdeck's revenue for the twelve months ended June
1998 was approximately $57 million.
Symantec typically incurs significant expenses in connection with its
acquisitions, which have a significant adverse impact on the Company's
profitability and financial resources. Future acquisitions may have a
significant adverse impact on the Company's future profitability and financial
resources.
CHANNEL FILL. The Company's 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. Distributor
inventories may be decreased between the date Symantec announces a new version
or new product and the date of release, because distributors, dealers and end
users often delay purchases, cancel orders or return products in anticipation of
the availability of the new version or new product. The impact of channel fill
is somewhat mitigated by the Company's deferral of revenue associated with
distributor and reseller inventories estimated to be in excess of appropriate
levels; however, net revenues may still be materially affected favorably or
adversely by the effects of channel fill, particularly in periods where a large
number of new products are simultaneously introduced.
20
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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 sell-through does not occur at a sufficient rate, distributors
will delay purchases or cancel orders in later periods or return prior purchases
in order to reduce their inventories.
While such order delays or cancellations can cause fluctuations in net revenues
from one quarter to the next, the impact is substantially mitigated by the
Company's deferral of revenue associated with inventories estimated to be in
excess of appropriate levels in the distribution and retail channels. A material
adverse impact on revenue, however, can occur.
PRODUCT RETURNS. Product returns can occur when the Company introduces upgrades
and new versions of products or when distributors or retailers have excess
inventories. Symantec's return policy allows its distributors, subject to
certain limitations, to return purchased products in exchange for new products
or for credit towards future purchases. End users may return products through
dealers and distributors within a reasonable period from the date of purchase
for a full refund, and retailers may return older versions of the Company's
products. The Company estimates and maintains reserves for product returns.
However, future returns could exceed the reserves established by the Company,
which could have a material adverse affect on the operating results of the
Company.
FOREIGN OPERATIONS. A significant portion of Symantec's revenues, manufacturing
costs and operating expenses are transacted in foreign currencies. As a result,
the Company's results may be materially and adversely affected by fluctuations
in currency exchange rates, as well as increases in duty rates, exchange or
price controls or other restrictions on foreign currencies. The Company expects
that its non-U.S. dollar denominated sales activities may increase in the
future. Continued fluctuations in the currency markets could materially and
adversely impact Symantec's revenues.
The Company's international operations are subject to certain risks common to
international operations, such as government regulations, import restrictions,
currency fluctuations, economic volatility, repatriation restrictions and, in
certain jurisdictions, reduced protection for the Company's copyrights and
trademarks. Symantec utilizes natural hedging to mitigate Symantec's foreign
currency transaction exposure and hedges certain residual balance sheet
positions through the use of one-month forward contracts. These strategies may
not continue to be effective, and the Company may not be successful in
accurately forecasting transaction gains or losses.
TECHNICAL SUPPORT. Consistent with many companies in the software industry,
technical support costs comprise a significant portion of the Company's
operating costs and expenses. The Company's technical support levels are based,
in a large part, on projections of future sales levels. Over the short term, the
Company may not be able to respond to fluctuations in customer demand for
support services or modify the format of the Company's support services to
compete with changes in support services provided by competitors. While the
Company performs extensive quality control review over its technical support
services provided by corporate personnel and, to a lesser extent, over support
services outsourced to third-party vendors, customer satisfaction with the
services rendered may not be favorable. In the event of customer
dissatisfaction, future product and upgrade sales to that customer base may be
negatively impacted. Fee-based technical support services did not generate
material revenues in any fiscal period presented and are not expected to
generate material revenues in the near future.
UNCERTAINTY OF RESEARCH AND DEVELOPMENT EFFORTS. Symantec believes significant
research and development expenditures will be necessary in order to remain
competitive. While the Company performs extensive usability and beta testing of
new products, any products currently being developed by Symantec may not be
technologically successful, resulting products may not achieve market
acceptance, and the Company's products may not compete effectively with
competitors' products either currently in the market or introduced in the
future.
LENGTH OF PRODUCT DEVELOPMENT CYCLE. The length of Symantec's product
development cycle has generally been greater than Symantec originally expected.
Although such delays have undoubtedly had a material adverse affect on
Symantec's business, Symantec is not able to quantify the magnitude of net
revenues that were deferred or lost as a result of any particular delay because
Symantec is not able to predict the amount of net revenues that would have
21
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
been obtained had the original development expectations been met. Delays in
future product development are likely to occur and could have a material adverse
affect on the amount and timing of future revenues. Due to the inherent
uncertainties of software development projects, Symantec does not generally
disclose or announce the specific expected shipment dates of the Company's
product introductions.
OPERATING LEVERAGE. Consistent with the experience of many companies in the
software industry, Symantec's employee and facility related expenditures
comprise a significant portion of the Company's operating expenses. The
Company's expense levels are based, in a large part, on projections of future
revenue levels. Given the fixed nature of these expenses over the short term, if
revenue levels fall below expectations, Symantec's operating results are likely
to be significantly and adversely affected.
MANAGEMENT OF EXPANDING OPERATIONS. Symantec continually evaluates its product
and corporate strategy and has in the past and will in the future undertake
organizational changes, product and marketing strategy modifications which are
designed to maximize market penetration, maximize use of limited corporate
resources and develop new products and product channels. These organizational
changes increase the risk that objectives will not be met due to the allocation
of valuable limited resources to implement changes. Further, due to the
uncertain nature of any of these undertakings, these efforts may not be
successful, and the Company may not realize any benefit from these efforts.
EMPLOYEE RISK. Competition in recruiting personnel in the software industry is
intense. Symantec believes that its future success will depend in part on its
ability to recruit and retain highly skilled management, marketing and technical
personnel. Symantec believes that it must provide personnel with a competitive
compensation package, which necessitates the continued availability of stock
options which, in turn, requires ongoing stockholder approval.
BUSINESS DISRUPTION. A disruption in communications between the Company's
geographically dispersed order entry and product shipping centers, particularly
at the end of a fiscal quarter, would likely result in an unexpected shortfall
in net revenues and could result in an adverse impact on operating results.
Disruptions in communications and Internet connectivity may also cause delays in
customer access to Symantec's 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 future net revenues of the
Company.
LITIGATION. Symantec is involved in a number of judicial and administrative
proceedings incidental to its business. The Company intends to defend and/or
pursue all of these lawsuits vigorously and, although an unfavorable outcome
could occur in one or more of the cases, the final resolution of these lawsuits,
individually or in the aggregate, is not expected to have a material adverse
affect on the financial position of the Company. However, depending on the
amount and timing of an unfavorable resolution of these lawsuits, it is possible
that the Company's future results of operations or cash flows could be
materially adversely affected in a particular period. (See Note 6 of Notes to
Consolidated Financial Statements in this Form 10-Q).
INTELLECTUAL PROPERTY RIGHTS. Symantec regards its software as proprietary and
relies on a combination of copyright, patent and trademark laws, non-disclosure
agreements and license agreements in an attempt to protect its rights. Despite
these precautions, it may be possible for unauthorized third parties to copy
aspects of Symantec's products or to obtain and use information that Symantec
regards as proprietary. All of Symantec's products are protected by copyright,
and Symantec has a number of patents and patent applications pending. However,
existing patent and copyright laws afford limited practical protection. In
addition, the laws of some foreign countries do not protect Symantec's
proprietary rights in its products to the same extent as do the laws of the
United States. Symantec's products are not copy protected.
22
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
As the number of software products in the industry increases and the
functionality of these products further overlap, Symantec believes that software
developers will become increasingly subject to infringement claims. This risk is
potentially greater for companies, such as Symantec, that obtain certain of
their products through publishing agreements or acquisitions, since they have
less direct control over the development of those products.
In addition, an increasing number of patents are being issued that are
potentially applicable to software, and allegations of patent infringement are
becoming increasingly common in the software industry. It is impossible to
ascertain all possible patent infringement claims because new patents are being
issued continually, the subject of patent applications is confidential until a
patent is issued, and it may not be apparent even from a patent that has already
been issued whether it is potentially applicable to a particular software
product. This increases the risk that Symantec's products may be subject to
claims of patent infringement. Although such claims may ultimately prove to be
without merit, they are time consuming and expensive to defend. Symantec has
been involved in disputes claiming patent infringement in the past, is currently
involved in a number of such disputes and litigation, and may be involved in the
future in such disputes and/or litigation. If Symantec is alleged to infringe
one or more patents, it may choose to litigate the claim and/or seek an
appropriate license. If litigation were to commence and a license were not
available on reasonable terms or if another party were found to have a valid
patent claim against Symantec, such a result could have a material adverse
affect on Symantec's business, operating results and financial condition (See
Note 6 of Notes to Consolidated Financial Statements in this Form 10-Q).
SOFTWARE DEFECTS AND PRODUCT LIABILITY. Software products frequently contain
errors or defects, especially when first introduced or when new versions or
enhancements are released. In the past, for example, Symantec's anti-virus
software products have incorrectly detected viruses which do not exist. Although
the Company has not experienced any material adverse effects resulting from any
such defects or errors to date, defects and errors could be found in current
versions, future upgrades to current products or newly developed and released
products, despite testing prior to release. Software defects could result in
delays in market acceptance or unexpected reprogramming costs, which could have
a material adverse affect on the Company's operating results. While Symantec has
not been the target of software viruses specifically designed to impede the
performance of the Company's products, such viruses could be created and
deployed against Symantec's products in the future.
Most of the Company's license agreements with its customers contain provisions
designed to limit the exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in such
license agreements 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 the Company's
business, operating results and financial condition.
EUROCURRENCY CONVERSION. Symantec conducts business and maintains operations in
Europe. Symantec will be affected by the introduction of a single European
currency, the euro. Symantec has a task force in place that is reviewing the
impact of this event on its systems, business and operations and expects to
implement the system and business modifications necessary to be euro-compliant
by January 4, 1999, Symantec's first day of the fiscal period for which
compliance is required. The financial impact on Symantec is not expected to be
material. It is uncertain when the appropriate European entities will change
their functional currency to the euro.
From a tax perspective, the conversion to the euro is not expected to have a
material impact for Symantec. In addition, our current programs related to
hedging transaction risk or using derivatives are not likely to change or be
impacted by the conversion to euro.
It is not possible to fully assess the impact of the single currency on our
European sales or whether changes being made by Symantec will be successful. As
a result, changes in the European market as a result of the introduction of the
euro and/or Symantec's response to the introduction of the euro may have an
adverse impact on revenues and results from operations.
23
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
YEAR 2000 - PRODUCT LIABILITY. While the Company believes that most of its
currently developed and actively marketed products are Year 2000 compliant for
significantly all functionality, these software products could contain errors or
defects related to the Year 2000. Versions of the Company's products that are
not the most currently released or that are not currently being developed may
not be Year 2000 compliant. The Company sells some of its older product lines,
which are not being actively developed and updated, and such products are also
not necessarily Year 2000 compliant. Symantec is currently party to a lawsuit
related to the alleged inability of pre-version 4.0 Norton AntiVirus products to
function properly in respect to Year 2000. Symantec believes that this lawsuit
has no merit and intends to defend itself vigorously. The final resolution of
this lawsuit is not expected to have a material adverse affect on the results of
operations and financial condition of the Company, although it is not possible
to estimate the possible loss. Depending, however, on the amount and timing of
an unfavorable resolution of this lawsuit, it is possible that the Company's
future results of operations or cash flows could be materially adversely
affected in a particular period (See Note 6 of Notes to Consolidated Financial
Statements in this Form 10-Q).
YEAR 2000 - CORPORATE SYSTEMS. The Company has recently completed a major
evaluation of its applications systems and databases and is modifying or
replacing portions of its hardware and associated software to enable its
operational systems and networks to function properly with respect to dates
leading up to January 1, 2000 and thereafter. The Company continues to evaluate
system interfaces with third-party systems, such as those of key suppliers,
distributors and financial institutions, for Year 2000 functionality. The
Company expects the process of evaluating third-party Year 2000 compliance to be
an ongoing process through the Year 2000. The Company is evaluating Year 2000
exposures of its key suppliers, as well as those of company buildings and
related facilities. The costs to complete the Year 2000 project are expected to
be approximately $2 million and will be expensed as incurred.
The year 2000 Project is divided into several phases:
Assessment, where the vulnerability of the hardware, software, process or
service element is identified. Remediation Planning, where corrective
action is determined for each vulnerable element. Remediation and Unit
Testing, where the corrective action is taken and initial testing is
performed. Limited System Testing, where related elements are tested
together, using dates in the vulnerable range.
Project progress is tracked on a sub-project level as noted below. The following
table summarizes the completion status and currently expected completion date
for each phase for each sub-project. The expected completion dates are
forward-looking statements that are subject to the risks and uncertainties of
locating and correcting errors in complex computer systems, and actual dates of
completion may vary significantly.
SUB-PROJECT PHASE AND STATUS OR DUE DATE
- ----------- ---------------------------------------------------------------------
Limited
Assessment Planning Remediation System Test
- ---------------------------- ------------ ------------ ------------ ------------
Business Systems Complete Complete Complete Jan-Jun 1999
Networks, Servers & Communications Dec 1998 Oct-Dec 1998 Jan-Jun 1999 Jul-Dec 1999
Desktop and Mobile Computers Jan-Jun 1999 Jan-Jun 1999 Jan-Jun 1999 Jul-Dec 1999
Buildings and Related Facilities Dec 1998 Mar 1999 Jan-Jun 1999 Jul-Dec 1999
Suppliers and Outside Services Dec 1998 Mar 1999 Jan-Jun 1999 Jul-Dec 1999
24
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
The Company believes that, with its conversions to new software and
modifications to existing computer hardware and software, the Year 2000 issue
will not pose significant operational problems for its computer systems.
However, if remaining modifications and conversions are not made, or are not
completed in a timely manner, the Year 2000 issue could have a material adverse
impact on the operations of the Company.
Additionally, the systems of other companies with which Symantec does business
may not address Year 2000 problems on a timely basis, which could have an
adverse effect on Symantec's systems or business transactions.
As testing of Year 2000 functionality of the Company's systems must occur in a
simulated environment, the Company will not be able to test fully all Year 2000
interfaces and capabilities prior to Year 2000. The Company believes that its
exposure on Year 2000 issues is not material to its business as a whole and has
not deferred any other information systems projects as a result of its focus on
Year 2000 compliance issues. Periodic updates regarding the Year 2000 status are
provided to both the Executive staff and Board of Directors.
If certain key suppliers or distributors should suffer business interruptions
due to Year 2000 problems, the Company could be forced to delay product
shipments. If there should be significant periods of electric power or telephone
service interruptions, some of the Company's facilities might be unable to
operate. The Company maintains Business Recovery Plans for its major locations,
to provide for orderly response to various disaster scenarios. These will be
reviewed and augmented to provide contingency plans for potential Year 2000
related problems, both internal and external. Completion of the analysis and the
associated contingency plans is scheduled for June 1999.
25
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
OVERVIEW
Symantec develops utility software for business and personal computing.
Symantec's business strategy is to satisfy customer needs by developing and
marketing products across multiple operating platforms that make customers
productive and keep their computers safe and reliable - anywhere, anytime.
Founded in 1982, the Company has offices in the United States, Canada, Mexico,
Asia, Australia, New Zealand, Europe, Africa and South America.
Symantec has a 52/53-week fiscal accounting year. The six months ended September
30, 1998 comprised 26 weeks of revenue and expense activity, while the
comparable prior year period comprised 27 weeks.
RESULTS OF OPERATIONS
During the September 1998 quarter, the Company acquired certain assets of Intel
Corporation ("Intel") (See Note 8 of Notes to Consolidated Financial Statements
in this Form 10-Q). During the June 1998 quarter, the Company acquired certain
assets of International Business Machines ("IBM") and Binary Research Limited
("Binary") (See Note 8 of Notes to Consolidated Financial Statements in this
Form 10-Q). The results of operations from these have been included in
Symantec's results of operations since the date of acquisition.
The following table sets forth each item from the consolidated statements of
operations as a percentage of net revenues and the percentage change in the
total amount of each item for the periods indicated.
Three Months Six Months
Ended Percent Ended Percent
September 30, Change September 30, Change
---------------- in Dollar ----------------- in Dollar
1998 1997 Amounts 1998 1997 Amounts
---- ---- --------- ---- ---- ---------
(Unaudited)
Net revenues ...................................... 100% 100% 1% 100% 100% 7%
Cost of revenues .................................. 15 16 (4) 14 16 (3)
--- --- --- ---
Gross margin ....................... 85 84 2 86 84 9
Operating expenses:
Research and development ................. 18 17 9 17 16 12
Sales and marketing ...................... 50 44 15 48 45 14
General and administrative ............... 7 7 14 7 7 8
Acquired in-process research and
development ......................... 4 -- -- 12 -- --
Litigation judgment ...................... -- -- -- 2 -- --
Restructuring and other expenses ......... 4 -- -- 2 -- --
--- --- --- ---
Total operating expenses ............ 83 68 24 88 68 37
--- --- --- ---
Operating income (loss) ........................... 2 16 (92) (2) 16 *
Interest income ................................... 2 2 22 3 3 38
Interest expense .................................. -- -- (1) -- -- 12
Other income (expense), net ....................... -- 1 * 1 -- 218
--- --- --- ---
Income before income taxes ........................ 4 19 (81) 2 19 (89)
Provision for income taxes ........................ 2 4 (56) 3 5 (28)
--- --- --- ---
Net income (loss) ................................. 2% 15% (89) (1)% 14% *
=== === === ===
* percentage change is not meaningful.
26
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
NET REVENUES.
Net revenues increased 1% to approximately $140 million in the September 1998
quarter from $139 million in the September 1997 quarter.
Net revenues increased 7% to $293 million in the six month period ended
September 30, 1998 from $274 million in the six month period ended September 30,
1997. The increase in total revenues between the six month comparable periods
was due primarily to increases in OEM and site license revenues from
transactions that closed at the end of the June 1998 quarter (See further
discussion in Item 2: Factors That May Affect Future Results: Quarterly Buying
Patterns).
Revenues from retail sales were somewhat lower in the September and June 1998
quarters compared to the September and June 1997 quarters and also significantly
less than in the March 1998 quarter. Revenues from retail sales were lower in
the June 1998 and September 1998 quarters as compared with the March 1998
quarter primarily due to a general softness in the retail markets in the United
States and due to the economic situations in our international markets with the
exception of Europe. Net revenues were also lower in the September 1998 quarter
than expected due to: a power outage in the Company's Dublin facility on the
last day of the September 1998 quarter, recent economic changes in Latin
America, and a significant OEM contract that did not materialize in the
Company's Internet Tools division (See Item 2: Factors That May Affect Future
Results: Business Disruption; Foreign Operations; and Quarterly Buying
Patterns).
BUSINESS UNITS.
The Security and Assistance business unit is dedicated to assisting in
customers' daily use of computers by increasing productivity and keeping
computers safe and reliable. The Security and Assistance business unit comprised
approximately 52% and 48% of net revenues in the quarters ended September 30,
1998 and 1997, respectively. The Security and Assistance business unit comprised
approximately 49% and 48% of net revenues in the six month periods ended
September 30, 1998 and 1997, respectively. Increased net revenues for the
business unit in the comparable three and six month periods were primarily
related to increased revenues for two new products, Norton Ghost and the new
utility suite, Norton SystemWorks, and increases in sales of Norton Antivirus
for multi-platform workstations and Norton Antivirus for the Macintosh partially
offset by decreases in Norton Utilities for Windows. In addition, revenues from
the Company's Norton Uninstall Deluxe product were less than expected due to the
removal of the product from the market (See Note 6 of Notes to Consolidated
Financial Statements in this Form 10-Q). The Norton Ghost product was acquired
as part of the purchase of certain assets of Binary in the June 1998 quarter
(See Note 8 of Notes to Consolidated Financial Statements in this Form 10-Q).
The Remote Productivity Solutions business unit helps remote professionals
remain productive and work reliably, anywhere, anytime. The Remote Productivity
Solutions business unit comprised approximately 38% and 39% of the Company's net
revenues for the quarters ended September 30, 1998 and 1997, respectively, and
net revenues in absolute dollars were relatively flat. Revenues increased for
pcANYWHERE for Windows 95 and a new product, pcTelecommute, which was offset by
decreases in revenues for ACT! for Windows, WinFax PRO and WinFax Lite. The
Remote Productivity Solutions business unit comprised approximately 37% and 38%
of net revenues for the six month periods ended September 30, 1998 and 1997,
respectively. The absolute dollar increase for the six month comparable
September periods was primarily due to increased revenues for pcANYWHERE for
Windows 95 partially offset by decreased revenues for WinFax PRO for Windows 95,
WinFax Lite and WinFax PRO.
Internet Tools, Royalties and Other, which includes products providing an easy
to use Java development environment, as well as revenue streams from the sale of
certain of the Company's other software product lines and technologies, and
revenues from products nearing the end of their life cycles, comprised
approximately 10% and 13% of the Company's net revenues in the quarters ended
September 30, 1998 and 1997, respectively and 14% for each of the six month
periods ended September 30, 1998 and 1997. The business unit's net revenues
decreased in the quarter ended September 30, 1998 over the quarter ended
September 30, 1997 primarily due to reductions in
27
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
revenues from products in Internet Tools and reductions in revenues from
products nearing the end of their life cycles. The business unit's net revenues
increased in the comparable six month September periods due to increased product
sales in Internet Tools, which included $6 million of revenue from a contract
with a single customer, and increased royalties, partially offset by decreased
revenues from products nearing the end of their life cycles.
Included in Internet Tools, Royalties and Other are royalties and other revenue
of approximately $10 million and $13 million recorded in the quarters ended
September 30, 1998 and 1997, respectively, and $26 million and $27 million in
the six month periods ended September 30, 1998 and 1997, respectively. These
royalties and other revenues primarily related to the sale of certain software
products, technologies and tangible assets to JetForm Corporation ("JetForm")
and the Hewlett-Packard Company ("Hewlett-Packard") during fiscal 1997.
Royalties from Hewlett-Packard will end in the December 1998 quarter.
Payments from JetForm were higher in the three and six month periods ended
September 30, 1998 over the three and six month periods ended September 30, 1997
primarily due to a past amendment to the JetForm agreement accelerating the
payment schedule . JetForm has the option to tender payment in either cash or in
registered JetForm common stock, within a contractually defined quantity
threshold. Due to the uncertainty regarding the ultimate collectibility of these
installments, Symantec is recognizing the revenue as payments are due and
collectibility is assured from JetForm. In addition, JetForm payments were lower
in the three month period ended September 30, 1998 as compared to the three
month period ended June 30, 1998, and payments are expected to decline in future
periods through the June 2000 quarter.
INTERNATIONAL. Net revenues from international sales outside of North America
were $46 million and $41 million and represented 33% and 30% of total net
revenues in the quarters ended September 30, 1998 and 1997, respectively. The
increase in net revenues was the result of sales growth in Europe, Middle East
and Africa ("EMEA") partially offset by decreases in Latin America due to their
economic slowdown.
Net revenues from international sales outside of North America were $95 million
and $82 million and represented 32% and 30% of net revenues in the six month
periods ended September 30, 1998 and 1997. The increase in net revenues was the
result of sales growth in EMEA and Japan.
Foreign exchange rate fluctuations during the three and six month periods ended
September 30, 1998 compared to the three and six month periods ended September
30, 1997 did not materially affect revenue for either period.
GROSS MARGIN.
Gross margin represents net revenues less cost of revenues. Cost of revenues
consists primarily of manufacturing expenses, costs of producing manuals,
packaging costs, royalties paid to third parties under publishing contracts and
amortization and write-off of capitalized software.
Gross margin increased to 85% of net revenues in the three month period ended
September 1998 from 84% in the three month period ended September 1997. Gross
margin increased to 86% from 84% in the six month periods ended September 30,
1998 and 1997, respectively.
Factors contributing to an increase in gross margin percentage during the
comparable three and six month September periods include a reduction in royalty
expense, partially offset by increases in capitalized software amortization from
acquisitions. In addition, for the six month comparable September periods, there
was a product mix favoring the Company's higher margin site license and OEM
business.
CAPITALIZED SOFTWARE. During the September 1998 quarter, Symantec capitalized
approximately $11 million of software technology acquired as part of the
Company's acquisition of certain assets of Intel (See Note 8 of Notes to
Consolidated Financial Statements in this Form 10-Q). During the June 1998
quarter, Symantec capitalized approximately $14 million of software technology
acquired as part of the Company's acquisition of certain assets of Binary (See
Note 8 of Notes to Consolidated Financial Statements in this Form 10-Q).
28
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Amortization of capitalized software, including amortization and write-off of
both purchased product rights and capitalized software development expenses,
totaled approximately $1 million and less than $1 million in the three month
periods ended September 30, 1998 and 1997, respectively. In addition,
amortization of capitalized software, including amortization and write-off of
both purchased product rights and capitalized software development expenses,
totaled approximately $2 million and less than $1 million for the six month
periods ended September 30, 1998 and 1997, respectively. Symantec expects
capitalized software amortization to increase in future periods. Symantec is
expected to record approximately $1 million of capitalized software amortization
per quarter, over the next 11 quarters, related to amounts capitalized as part
of the acquisition of certain assets of Binary. In addition, Symantec is
expected to record less than $1 million of capitalized software amortization per
quarter, over the next 20 quarters, related to amounts capitalized as part of
the acquisition of certain assets of Intel.
RESEARCH AND DEVELOPMENT EXPENSES.
Research and development expenses were 18% and 17% of net revenues for the three
month periods ended September 30, 1998 and 1997 and 17% and 16% of net revenues
for the six month periods ended September 30, 1998 and 1997. Research and
development expenses are charged to operations as incurred.
Research and development expenses increased 9% to $26 million in the September
1998 quarter from $24 million in the September 1997 quarter primarily due to
growth in legal expenses related to product claims and employee related
expenses. Research and development expenses increased 12% to $51 million in the
six month period ended September 30, 1998 from $45 million in the six month
period ended September 30, 1997 primarily due to growth in employee related
expenses and legal expenses related to product claims.
SALES AND MARKETING EXPENSES.
Sales and marketing expenses were 50% and 44% of net revenues in the three month
periods ended September 30, 1998 and 1997 and 48% and 45% of net revenues in the
six month periods ended September 30, 1998 and 1997. The increase in sales and
marketing expenses as a percentage of revenue for the comparable three and six
month September periods is abnormally high due to actual revenue coming in below
estimates partially due to the general softness in the retail market. The
absolute dollar increase in sales and marketing expenses in both the three and
six month comparable September periods is due to increases in employee related
expenses and advertising and promotion expenditures. The increase in advertising
expenditures for the six month comparable September periods primarily related to
the Company's Security and Assistance business unit.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses increased approximately 14% to $10 million
in the three month period ended September 30, 1998 from $9 million in the three
month period ended September 30, 1997. General and administrative expenses
increased 8% to $19 million in the six month period ended September 30, 1998
from $18 million in the six month period ended September 30, 1997. The absolute
dollar increase for both the three and six month comparable September periods
primarily related to expenses incurred as a result of the termination of a
management consulting contract during the September 1998 quarter. General and
administrative expenses were 7% of net revenues during both the comparable three
and six month periods ended September 30, 1998 and 1997.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES.
Acquired in-process research and development expenses were approximately $5
million in the three month period ended September 30, 1998 in connection with
the acquisition of certain assets of Intel (See Note 8 of Notes to Consolidated
Financial Statements in this Form 10-Q). Acquired in-process research and
development expenses were approximately $34 million in the six month period
ended September 30, 1998. In addition to the
29
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
approximately $5 million recorded in connection with the acquisition of certain
assets of Intel, Symantec recognized acquired in-process research and
development expenses of $16 million and $13 million, respectively, related to
the acquisition of certain assets of IBM and Binary in the June 1998 quarter
(See Note 8 of Notes to Consolidated Financial Statements in this Form 10-Q).
There were no acquired in-process research and development expenses recognized
in the three and six month periods ended September 30, 1997.
LITIGATION JUDGMENT.
There were no litigation judgment expenses recorded in the three months ended
September 30, 1998. Litigation judgment expenses totaled approximately $6
million in the six month period ended September 30, 1998. These expenses related
to a judgment by a Canadian court on a decade-old copyright action assumed by
Symantec when it purchased Delrina Corporation (See Note 6 of Notes to
Consolidated Financial Statements in this Form 10-Q). There were no litigation
judgment expenses recorded in the three and six month periods ended September
30, 1997.
RESTRUCTURING AND OTHER EXPENSES.
Restructuring and other expenses consisted of the following:
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
(In thousands; unaudited) 1998 1997 1998 1997
------ ---- ------ ----
Personnel severance $3,800 $-- $3,800 $--
Planned abandonment of manufacturing
facility lease 1,305 -- 1,305 --
------ ---- ------ ----
Total restructuring and other expenses $5,105 $-- $5,105 $--
====== ==== ====== ====
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 an approximately $4 million charge for personnel
severance to reduce the workforce by approximately 5% in both domestic and
international operations and an approximately $1 million charge for the planned
abandonment of a manufacturing facility lease. As of September 30, 1998,
approximately $1 million of the $5 million has been incurred. These activities
will be substantially complete by the end of fiscal 1999.
As of September 30, 1998, total accrued acquisition, restructuring and other
expenses were approximately $6 million and include approximately $2 million for
the elimination of duplicative and excess facilities, $2 million for personnel
severance and $2 million for other expenses.
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME (EXPENSE), NET.
Interest income was approximately $4 million and $3 million in the three months
ended September 30, 1998 and 1997, respectively. Interest income increased 22%
in the three months ended September 30, 1998 over the three months ended
September 30, 1997 primarily due to a higher average invested cash balance and
gains on the sale of investments.
Interest income was approximately $8 million and $6 million in the six month
periods ended September 30, 1998 and 1997, respectively. Interest income
increased 38% in the six month period ended September 30, 1998 over the six
month period ended September 30, 1997 primarily due to a higher average invested
cash balance, gains on the sale of investments and interest income received with
income tax refunds.
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31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Interest expense was approximately $0.3 million for each of the three month
periods ended September 30, 1998 and 1997, and $0.7 million and $0.6 million for
the six month periods ended September 30, 1998 and 1997, respectively. Interest
expense principally relates to Symantec's convertible subordinated debentures.
Other income (expense), net was approximately ($0.5) million and $1 million in
the three month periods ended September 30, 1998 and 1997, respectively, and $2
million and $0.7 million in the six month periods ended September 30, 1998 and
1997, respectively. Other income (expense) decreased in the three month period
ended September 30, 1998 compared to the three month period ended September 30,
1997 due to foreign currency exchange losses from fluctuations in currency
exchange rates. Other income (expense) increased in the six month period ended
September 30, 1998 compared to the six month period ended September 30, 1997
primarily due to a foreign exchange gain realized during the June 1998 quarter,
as a result of the paydown of an intercompany loan.
INCOME TAX PROVISION.
The effective tax rate on income before income taxes, excluding charges for
acquired in-process research and development expenses, for the three and six
months ended September 30, 1998 was 32%. This rate is lower than the U.S.
federal statutory tax rate primarily due to a lower statutory tax rate on the
Company's Irish operations. The effective tax rate for the three and six months
ended September 30, 1997 was 23%.
The tax provision for the six months ended September 30, 1998 consists of two
items: a $13 million (or 32% effective tax rate) provision on income before
income taxes of $40 million. The $40 million excludes a $34 million charge for
acquired in-process research and development expenses. In addition, the $13
million tax provision is partially offset by a $5 million tax benefit on the $34
million charge for acquired in-process research and development. A valuation
allowance has been established for the portion of the deferred tax asset
attributable to the acquired in-process research and development charges that is
not expected to be realized within five years.
LIQUIDITY AND CAPITAL RESOURCES.
Cash, short-term investments and long-term investments decreased $53 million to
$207 million at September 30, 1998 from $260 million at March 31, 1998. This
decrease was largely due to the repurchase of 1.7 million shares of Symantec
common stock for approximately $40 million during the September 1998 quarter. In
addition, portions of the decrease were due to the acquisition of certain assets
of Binary for $27.5 million and an $8 million payment to IBM during the quarter
ended June 30, 1998 related to the acquisition of certain assets (See Note 8 of
Notes to Consolidated Financial Statements in this Form 10-Q).
In addition to cash, short-term investments and long-term investments of $207
million, the Company has $67 million of restricted investments related to
collateral requirements under certain lease agreements entered into during
fiscal 1997. Symantec is obligated under these lease agreements for two existing
office buildings (Cupertino City Center One or "CCC1" and World Head Quarters or
"WHQ"), one parcel of land and one office building (Cupertino City Center Five
or "CCC5") under construction 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 operating cash requirements.
On September 22, 1998, an agreement was entered into, subject to certain closing
conditions that have not yet been met, whereby the landlord intends to exchange
CCC5 for another leased building (Cupertino City Center Two or "CCC2") both
located in Cupertino, California. If this transaction is consummated, Symantec
would move both personnel and equipment into CCC2 once certain tenant
improvements are completed. In conjunction, Symantec would be relieved of
responsibility for its lease of WHQ. As of November 13, 1998, the parties are
conducting due diligence which is scheduled to end on November 20, 1998. During
this period, either party may decide not to go forward with the deal at such
party's sole discretion without penalty.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
On October 15, 1998, Symantec announced it signed a definitive merger agreement
to acquire Quarterdeck Corporation. Under the terms of the agreement, Symantec
will commence a cash tender offer for all outstanding shares of Quarterdeck
common stock at a price of $0.52 per share. The aggregate purchase price to be
allocated to acquired assets and liabilities is expected to be approximately $70
to $75 million which includes common stock and equivalents, acquisition related
costs and any negative tangible net worth at the time of closing, if the tender
offer is accepted. The Boards of Directors of both companies have approved the
transaction. Completion of the tender offer is subject to certain conditions,
including the tender of a majority of the Quarterdeck shares, receipt of
government approvals and the expiration of applicable waiting periods under the
Hart-Scott-Rodino Act. Effective as of November 3, 1998, the Department of
Justice has granted early termination of the waiting period under the
Hart-Scott-Rodino Act, allowing Symantec to proceed with its acquisition of
Quarterdeck Corporation. Quarterdeck's revenue for the twelve months ended June
1998 was approximately $57 million.
Net cash provided by operating activities was approximately $43 million for the
six months ended September 30, 1998 and was comprised of the Company's net loss
of approximately $3 million, offset by non-cash related expenses of
approximately $45 million and a net decrease in assets and liabilities,
excluding effects of acquisitions, of approximately $1 million.
Net trade accounts receivable increased $2 million to $67 million at September
30, 1998 from $65 million at March 31, 1998. Days sales outstanding was 43 days
at September 30, 1998 and 38 days at March 31, 1998. The increase in days sales
outstanding is due to a greater amount of revenue booked in the month of
September 1998 versus the month of March 1998.
On June 9, 1998, the Board of Directors of Symantec authorized the repurchase of
up to 5% of Symantec's outstanding common stock before December 31, 1998. Among
other purposes, the shares will be used for employee stock purchase programs and
option grants. The Company did not repurchase any shares during the June 1998
quarter. The Company repurchased 1.7 million shares at prices ranging from
$17.13 to $27.21 for an aggregate amount of approximately $40 million during the
September 1998 quarter. Of the $40 million, approximately $18 million was
charged to retained earnings after appropriate amounts were deducted from common
stock and capital in excess of par. Subsequent to September 30, 1998 and through
October 30, 1998, the Company completed the repurchase and has now repurchased a
total of 2.875 million shares at prices ranging from $13.10 to $27.21, for an
aggregate amount of approximately $56 million.
The Company recently renewed its $10 million line of credit which expires in May
2000. The Company was in compliance with the debt covenants for this line of
credit as of September 30, 1998. At September 30, 1998, there were no borrowings
and less than $1 million of standby letters of credit outstanding under this
line. Future acquisitions by the Company may cause the Company to be in
violation of the line of credit covenants. However, the Company believes that if
the line of credit were canceled or amounts were not available under the line,
there would not be a material adverse impact on the financial results, liquidity
or capital resources of the Company.
If Symantec were to sustain significant losses, the Company could be required to
reduce operating expenses, which could result in product delays; reassess
acquisition opportunities, which could negatively impact the Company's growth
objectives; and/or pursue further financing options. The Company believes
existing cash and short-term investments and cash generated from operating
results will be sufficient to fund operations for the next year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is incorporated by reference to Note 6 of
Notes to Consolidated Financial Statements included herein on page 10 of this
Form 10-Q.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Information with respect to this item is incorporated by reference to Note 10 of
Notes to Consolidated Financial Statements in 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 17,
1998.
(b) Matters voted on at the meeting and votes cast on each were as follows:
Total Vote Authority
Total Vote Withheld Withheld
For Each From Each From All
Director Director Nominees
-------- -------- --------
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 ............................................................ 49,865,846 566,368 --
Charles M. Boesenberg ..................................................... 49,617,313 815,024 --
Walter W. Bregman ......................................................... 49,866,675 565,662 --
Carl D. Carman ............................................................ 49,641,673 790,542 --
Gordon E. Eubanks, Jr ..................................................... 49,548,405 883,932 --
Robert S. Miller .......................................................... 49,828,545 603,792 --
Robert R. B. Dykes ........................................................ 49,616,528 815,809 --
Broker
For Against Abstain "Non-Votes"
---------- ---------- ------- -----------
2. To consider and act upon a proposal to (i) amend Symantec's 1996 Equity 27,176,496 23,121,228 135,223 --
Incentive Plan (the "96 Plan") to make available for issuance an
additional 2,275,148 shares of Symantec Common Stock, which will raise
the 96 Plan's limit on shares that may be issued pursuant to awards
granted from 6,726,654 to 9,001,802, (ii) provide formula grants of
option awards to non-employee directors of Symantec and (iii) make
certain technical changes to the 96 Plan.
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Broker
For Against Abstain "Non-Votes"
---------- ---------- ------- -----------
3. To consider and act upon a proposal to adopt Symantec's 1998 Employee 47,842,258 2,469,827 119,191 --
Stock Purchase Plan and reserve 500,000 shares of Symantec Common Stock
for issuance thereunder.
4. To consider and act upon a proposal to ratify the Board of Director's 50,303,004 47,562 82,381 --
selection of Ernst & Young L.L.P. as Symantec's independent auditors
for the 1999 fiscal year.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as part of this Form 10-Q or
are incorporated by reference:
10.01 Office building lease, as amended, dated as of May 1, 1998,
by and between RND Funding Company I and Symantec
Corporation regarding property located in Sunnyvale,
California.
10.02 (i) Participation agreement, as amended by that certain
Master Amendment No. 2, dated as of September 21, 1998, by
and among Symantec Corporation, Sumitomo Bank Leasing and
Finance, Inc. and The Sumitomo Bank, Limited. (ii) Pledge
agreement, as amended, by that certain Master Amendment No.
2, dated as of September 21, 1998, by and among Symantec,
the Bank, and Donaldson, Lufkin & Jenrette Securities
Corporation.
10.03 Software license agreement, dated as of September 27, 1998,
between Symantec Corporation and Intel Corporation
(Incorporated by reference to Exhibit 10.1 filed with the
Registrant's Current Report of Form 8-K filed October 5,
1998).
10.04 Rights agreement, dated as of August 12, 1998 between
Symantec Corporation and BankBoston, N.A., as Rights Agent,
which includes as Exhibit A the form of Certificate of
Designations of Series A Junior Participating Preferred
Stock, as Exhibit B the Form of Right Certificate and as
Exhibit C the Summary of Rights to Purchase Preferred Shares
(Incorporated by reference to Exhibit 4.1 filed with the
Registrant's Form 8-A filed August 19, 1998).
10.05 The registrant's Bylaws, as amended and restated effective
August 11, 1998 (Incorporated by reference to Exhibit 3.1
filed with the Registrant's Current Report of Form 8-K filed
August 19, 1998).
10.06 Agreement for exchange and purchase and escrow instructions,
dated September 22, 1998, by and between Symantec
Corporation with respect to CCC5 and WHQ and TST
Development, L.L.C. with respect to CCC2.
10.07 Agreement for exchange and purchase and escrow instructions,
as amended, dated November 4, 1998 by and between Symantec
Corporation and TST Development, L.L.C.
27.01 Financial Data Schedule for the Six Months Ended September
30, 1998.
27.02 Financial Data Schedule for the Six Months Ended September
30, 1997 (restated).
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(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on August 19, 1998,
reporting the adoption of a stockholder rights plan, pursuant to a
Rights Agreement, dated August 12, 1998, between Symantec Corporation
and BankBoston, N.A., as Rights Agent, which includes as Exhibit A the
form of Certificate of Designations of Series A Junior Participating
Preferred Stock, as Exhibit B the Form of Right Certificate and as
Exhibit C the Summary of Rights to Purchase Preferred Shares
(Incorporated by reference to Exhibit 4.1 filed with the Registrant's
Form 8-A filed August 19, 1998.)
A report on Form 8-K was filed by the Company on October 5, 1998,
reporting that the Company acquired rights to Intel Corporation's
anti-virus business. Symantec also licensed Intel systems management
technology which it will combine with its own antivirus technology to
create anti-virus solutions for corporate organizations. This
announcement is pursuant to a Software License Agreement, dated
September 27, 1998, between Symantec and Intel Corporation.
ITEMS 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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 13, 1998 SYMANTEC CORPORATION
By /s/ Howard A. Bain III
-------------------------------------------
Howard A. Bain III
Vice President/Worldwide
Operations and Chief Financial Officer
(duly authorized officer)
/s/ Gregory E. Myers
-------------------------------------------
Gregory E. Myers
Vice President Finance
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.01 Office building lease, as amended, dated as of May 1, 1998, by and
between RND Funding Company I and Symantec Corporation regarding
property located in Sunnyvale, California.
10.02 (i) Participation agreement, as amended by that certain Master
Amendment No. 2, dated as of September 21, 1998, by and among
Symantec Corporation, Sumitomo Bank Leasing and Finance, Inc. and
The Sumitomo Bank, Limited. (ii) Pledge agreement, as amended, by
that certain Master Amendment No. 2, dated as of September 21, 1998,
by and among Symantec, the Bank, and Donaldson, Lufkin & Jenrette
Securities Corporation.
10.03 Software license agreement, dated as of September 27, 1998, between
Symantec Corporation and Intel Corporation (Incorporated by
reference to Exhibit 10.1 filed with the Registrant's Current Report
of Form 8-K filed October 5, 1998).
10.04 Rights agreement, dated as of August 12, 1998 between Symantec
Corporation and BankBoston, N.A., as Rights Agent, which includes as
Exhibit A the form of Certificate of Designations of Series A Junior
Participating Preferred Stock, as Exhibit B the Form of Right
Certificate and as Exhibit C the Summary of Rights to Purchase
Preferred Shares (Incorporated by reference to Exhibit 4.1 filed
with the Registrant's Form 8-A filed August 19, 1998).
10.05 The registrant's Bylaws, as amended and restated effective August
11, 1998 (Incorporated by reference to Exhibit 3.1 filed with the
Registrant's Current Report of Form 8-K filed August 19, 1998).
10.06 Agreement for exchange and purchase and escrow instructions,
dated September 22, 1998, by and between Symantec Corporation with
respect to CCC5 and WHQ and TST Development, L.L.C. with respect to
CCC2.
10.07 Agreement for exchange and purchase and escrow instructions, as
amended, dated November 4, 1998 by and between Symantec Corporation
and TST Development, L.L.C.
27.01 Financial Data Schedule for the Six Months Ended September 30, 1998.
27.02 Financial Data Schedule for the Six Months Ended September 30, 1997
(restated).