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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 1, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______.
COMMISSION FILE NUMBER 0-17781
- --------------------------------------------------------------------------------
SYMANTEC CORPORATION
(Exact name of registrant as specified in its charter)
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 1,739,880 shares of Delrina exchangeable stock, as of
February 1, 1999
COMMON STOCK, PAR VALUE $0.01 PER SHARE 55,656,505 SHARES
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SYMANTEC CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED JANUARY 1, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1998 and March 31, 1998........................... 3
Consolidated Statements of Operations
for the three and nine month periods ended December 31,
1998 and 1997 ....................................................... 4
Consolidated Statements of Cash Flow
for the nine months ended December 31, 1998 and 1997................. 5
Notes to Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 38
Item 6. Exhibits and Reports on Form 8-K........................................ 38
Signatures. .................................................................... 39
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMANTEC CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
(In thousands) 1998 1998
------------ ---------
ASSETS (unaudited)
Current assets:
Cash and short-term investments $ 182,776 $ 225,883
Trade accounts receivable 61,586 65,158
Inventories 6,890 3,175
Deferred income taxes 23,852 19,677
Other 15,355 14,646
--------- ---------
Total current assets 290,459 328,539
Long-term investments 8,586 34,258
Restricted investments 68,877 59,370
Equipment and leasehold improvements 53,831 50,030
Purchased product rights and capitalized software 30,854 1,470
Goodwill 47,054 --
Other 5,655 2,793
--------- ---------
$ 505,316 $ 476,460
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,157 $ 34,171
Accrued compensation and benefits 20,622 21,332
Other accrued expenses 106,868 64,532
Income taxes payable 11,319 24,634
6% convertible senior subordinated notes 25,000 --
Current portion of 7.75% convertible subordinated debentures 8,333 8,333
--------- ---------
Total current liabilities 220,299 153,002
7.75% convertible subordinated debentures and other 5,951 5,951
Long-term obligations 1,455 --
--------- ---------
Total long-term liabilities 7,406 5,951
Commitments and contingencies
Stockholders' equity:
Preferred stock (authorized: 1,000; issued and outstanding: none) -- --
Common stock (authorized: 100,000; issued and outstanding: 55,509
and 57,109 shares) 555 571
Capital in excess of par value 292,936 310,949
Minority interest in Quarterdeck (8,136) --
Notes receivable from stockholders (144) (144)
Retained earnings 11,135 18,690
Accumulated other comprehensive loss (18,735) (12,559)
--------- ---------
Total stockholders' equity 277,611 317,507
--------- ---------
$ 505,316 $ 476,460
========= =========
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SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
(In thousands, except per share data; unaudited) 1998 1997 1998 1997
- ------------------------------------------------ ---------- ---------- ---------- ----------
Net revenues $ 165,056 $ 148,240 $ 458,208 $ 422,269
Cost of revenues 26,637 22,591 68,454 65,900
---------- ---------- ---------- ----------
Gross margin 138,419 125,649 389,754 356,369
Operating expenses:
Research and development 24,407 21,907 75,143 67,079
Sales and marketing 71,883 68,161 212,287 191,095
General and administrative 9,745 9,505 29,198 27,563
In-process research and development 7,560 -- 41,850 --
Litigation judgment -- -- 5,825 --
Restructuring and other expenses -- -- 5,105 --
---------- ---------- ---------- ----------
Total operating expenses 113,595 99,573 369,408 285,737
---------- ---------- ---------- ----------
Operating income 24,824 26,076 20,346 70,632
Interest income 2,676 3,290 11,157 9,458
Interest expense (475) (318) (1,126) (897)
Other income, net 420 67 2,500 721
---------- ---------- ---------- ----------
Income before income taxes 27,445 29,115 32,877 79,914
Provision for income taxes 11,202 7,279 19,641 18,963
---------- ---------- ---------- ----------
Net income $ 16,243 $ 21,836 $ 13,236 $ 60,951
========== ========== ========== ==========
Net income per share - basic $ 0.29 $ 0.39 $ 0.23 $ 1.09
========== ========== ========== ==========
Net income per share - diluted $ 0.28 $ 0.37 $ 0.23 $ 1.02
========== ========== ========== ==========
Shares used to compute net income
per share - basic 55,531 56,277 56,675 55,891
========== ========== ========== ==========
Shares used to compute net income
per share - diluted 57,633 60,100 58,462 59,991
========== ========== ========== ==========
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SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended
December 31,
-----------------------------
(In thousands; unaudited) 1998 1997
- ------------------------------------------------------------------------- ---------- ----------
Operating Activities:
Net income $ 13,236 $ 60,951
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of equipment and leasehold improvements 19,145 19,075
Amortization and write-off of purchased product rights and
capitalized software 4,294 1,137
Amortization of goodwill 1,484 --
Write-off of in-process research and development 41,850 --
Write-off of equipment and leasehold improvements 298 1,382
Deferred income taxes (4,314) 65
Net change in assets and liabilities, excluding effects of
acquisitions:
Trade accounts receivable 11,095 (18,955)
Inventories (3,328) 388
Other current assets 2,317 (4,909)
Capitalized software development costs -- 26
Other assets 490 (398)
Accounts payable 1,951 4,875
Accrued compensation and benefits (2,771) 3,257
Other accrued expenses 13,584 9,875
Income taxes payable (13,472) 10,696
---------- ----------
Net cash provided by operating activities 85,859 87,465
---------- ----------
Investing Activities:
Capital expenditures (19,177) (20,148)
Purchased intangibles (3,901) (554)
Purchase of IBM's anti-virus business (8,000) --
Purchase of Binary Research Limited's operations (27,500) --
Purchase of majority interest in Quarterdeck Corporation (30,278) --
Purchase of Intel's anti-virus business (11,889) --
Purchases of marketable securities (128,633) (176,927)
Proceeds from sales of marketable securities 212,018 129,526
Purchases of long-term, restricted investments (9,507) (7,626)
---------- ----------
Net cash used in investing activities (26,867) (75,729)
---------- ----------
Financing Activities:
Repurchase of common stock (56,341) (21,346)
Net proceeds from sales of common stock and other 16,739 23,707
---------- ----------
Net cash provided by (used in) financing activities (39,602) 2,361
---------- ----------
Effect of exchange rate fluctuations on cash and cash equivalents (8,252) (3,130)
Increase in cash and cash equivalents 11,138 10,967
Beginning cash and cash equivalents 139,013 95,758
---------- ----------
Ending cash and cash equivalents $ 150,151 $ 106,725
========== ==========
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements of Symantec Corporation ("Symantec" or the
"Company") as of December 31, 1998 and for the three and nine month periods
ended December 31, 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 nine month
periods ended December 31, 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 December 1998 quarter, the Company acquired a 63% interest in
Quarterdeck Corporation ("Quarterdeck"). Under purchase accounting rules,
Symantec's operations have been combined with Quarterdeck's from the point the
equity interest was acquired. Symantec's equity section of the balance sheet
includes a minority interest line, which represents 37% of Quarterdeck's net
deficit. (See Note 8 of Notes to Consolidated Financial Statements in this Form
10-Q). During the September 1998 quarter, the Company acquired Intel
Corporation's ("Intel") anti-virus business (See Note 8 of Notes to Consolidated
Financial Statements in this Form 10-Q). During the June 1998 quarter, the
Company acquired International Business Machine's ("IBM") anti-virus business
and Binary Research Limited's ("Binary") operations (See Note 8 of Notes to
Consolidated Financial Statements in this Form 10-Q). Each of these acquisitions
was accounted for as a purchase and, accordingly, their operating results have
been included in the Company's consolidated financial statements since the date
of acquisition.
On January 6, 1999, the Company received a comment letter from the Securities
and Exchange Commission with respect to its Form 10-K for the fiscal year ended
March 31, 1998 and Form 10-Q for the quarter ended October 2, 1998. The comment
letter contained questions related to accounting for certain acquisitions,
including questions relating to the write-off of associated in-process research
and development costs. The Company is in the process of re-evaluating the Binary
and IBM transactions and the related in-process research and development costs
as well as the other questions raised in the comment letter. As a result, final
operating results for the quarters ended June, September and December, 1998 and
the related year-to-date amounts may be restated.
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. In December 1998, AcSEC issued SOP 98-9, which amends certain
provisions of SOP 97-2 and extends the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 until the beginning of Symantec's
fiscal year 2000. Symantec plans early adoption of SOP 98-9 on its financial
statements and related disclosures beginning in the March 1999 quarter. This
early adoption is not expected to have a material impact on its financial
condition or results of operations.
Symantec has a 52/53-week fiscal accounting year. Accordingly, all references as
of and for the periods ended December 31, 1998, March 31, 1998 and December 31,
1997 reflect amounts as of and for the periods ended January 1, 1999, April 3,
1998 and January 2, 1998, respectively. The nine months ended December 31, 1998
comprised 39 weeks of revenue and expense activity, while the comparable prior
year period comprised 40 weeks.
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. BALANCE SHEET INFORMATION
December 31, March 31,
(In thousands) 1998 1998
- ---------------------------------------------------------- ------------ ----------
(unaudited)
Cash, cash equivalents and short-term investments:
Cash $ 52,886 $ 28,236
Cash equivalents 97,265 110,777
Short-term investments 32,625 86,870
---------- ----------
$ 182,776 $ 225,883
========== ==========
Trade accounts receivable:
Receivables $ 67,414 $ 69,574
Less: allowance for doubtful accounts (5,828) (4,416)
---------- ----------
$ 61,586 $ 65,158
========== ==========
Inventories:
Raw materials $ 2,043 $ 1,091
Finished goods 4,847 2,084
---------- ----------
$ 6,890 $ 3,175
========== ==========
Equipment and leasehold improvements:
Computer hardware and software $ 130,110 $ 107,724
Office furniture and equipment 33,225 29,407
Leasehold improvements 24,376 21,038
---------- ----------
187,711 158,169
Less: accumulated depreciation and amortization (133,880) (108,139)
---------- ----------
$ 53,831 $ 50,030
========== ==========
Purchased product rights and capitalized software:
Purchased product rights and technologies $ 40,085 $ 1,358
Capitalized software development costs 2,363 2,414
Less: accumulated amortization of purchased product
rights and technologies (9,391) (563)
Less: accumulated amortization of capitalized software
development costs (2,203) (1,739)
---------- ----------
$ 30,854 $ 1,470
========== ==========
Other accrued expenses:
Deferred revenue $ 46,090 $ 25,537
Marketing development funds 10,545 12,815
Current obligations related to the purchase of
Quarterdeck 9,000 --
Current obligations related to the purchase of IBM
anti-virus business 8,000 --
Other 33,233 26,180
---------- ----------
$ 106,868 $ 64,532
========== ==========
Accumulated other comprehensive income loss:
Unrealized gain (loss) on available-for-sale investments $ (625) $ 157
Cumulative translation adjustment (18,110) (12,716)
---------- ----------
$ (18,735) $ (12,559)
========== ==========
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3. NET INCOME 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. The following table sets forth the
calculations underlying Symantec's basic and diluted net income per share for
the periods presented.
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ----------------------
(In thousands, except per share data; unaudited) 1998 1997 1998 1997
- ------------------------------------------------ -------- -------- -------- --------
BASIC NET INCOME PER SHARE
Net income $ 16,243 $ 21,836 $ 13,236 $ 60,951
======== ======== ======== ========
Weighted average number of common
shares outstanding during the period 55,531 56,277 56,675 55,891
======== ======== ======== ========
Basic net income per share $ 0.29 $ 0.39 $ 0.23 $ 1.09
======== ======== ======== ========
DILUTED NET INCOME PER SHARE
Net income $ 16,243 $ 21,836 $ 13,236 $ 60,951
Interest on convertible subordinated
debentures, net of income tax effect 169 169 -- 523
-------- -------- -------- --------
Net income, as adjusted $ 16,412 $ 22,005 $ 13,236 $ 61,474
======== ======== ======== ========
Weighted average number of common
shares outstanding during the period 55,531 56,277 56,675 55,891
Shares issuable from assumed exercise
of options 912 2,633 1,787 2,870
Shares issuable from assumed conversion
of convertible subordinated debentures 1,190 1,190 -- 1,230
-------- -------- -------- --------
Total shares for purpose of calculating
diluted net income per share 57,633 60,100 58,462 59,991
======== ======== ======== ========
Diluted net income per share $ 0.28 $ 0.37 $ 0.23 $ 1.02
======== ======== ======== ========
For the nine months ended December 31, 1998, 1,190,000 shares issuable upon
conversion of convertible subordinated debentures and $507,000 of interest
expense were excluded from the computation of diluted net income 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 Nine Months Ended
December 31, December 31,
------------------------ ---------------------
(In thousands; unaudited) 1998 1997 1998 1997
- -------------------------------------- --------- --------- --------- ---------
Personnel severance $ -- $ -- $ 3,800 $ --
Planned abandonment of manufacturing
facility lease -- -- 1,305 --
--------- --------- --------- ---------
Total restructuring and other expenses $ -- $ -- $ 5,105 $ --
========= ========= ========= =========
During the quarter ended September 30, 1998, the Company implemented a plan to
restructure certain of its operations, which included outsourcing its domestic
manufacturing operations. As a result, it recorded $3.8 million for personnel
severance to reduce the workforce by approximately 5% in both domestic and
international operations and $1.3 million for the planned abandonment of a
manufacturing facility lease. As of December 31, 1998, $3.1 million of the $5.1
million had been incurred. These activities will be substantially completed by
the end of March 1999.
As of December 31, 1998, total accrued acquisition, restructuring and other
expenses were approximately $4.3 million and include approximately $1.6 million
for the elimination of duplicative and excess facilities, $0.9 million for
personnel severance and $1.8 million for other expenses.
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 5. COMPREHENSIVE INCOME
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 or stockholders' equity. The
components of comprehensive income, net of tax, are as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------- -----------------------
(In thousands; unaudited) 1998 1997 1998 1997
- ---------------------------------------------------- -------- -------- -------- --------
Net income $ 16,243 $ 21,836 $ 13,236 $ 60,951
Other comprehensive income (loss):
Add: change in unrealized gain (loss) on
available-for-sale investments,
net of a tax provision (benefit) of ($125),
$35, ($250) and $65 (267) 117 (532) 218
Less: reclassification adjustment for gains
included in net income,
net of a tax provision of $0, $0,
$146 and $0 -- -- 310 --
Add: change in cumulative translation
adjustment ("CTA"), net of a tax
benefit of ($42), ($547), ($1,726)
and ($1,033) (89) (1,830) (3,668) (3,457)
Less: reclassification adjustment for CTA
included in net income,
net of a tax provision of $0,
$0, $604 and $0 -- -- 1,284 --
-------- -------- -------- --------
Total other comprehensive loss (356) (1,713) (5,794) (3,239)
-------- -------- -------- --------
Comprehensive income $ 15,887 $ 20,123 $ 7,442 $ 57,712
======== ======== ======== ========
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 6. LITIGATION AND CONTINGENCIES
On March 18, 1996, a class action complaint was filed by the law firm of
Milberg, Weiss, Bershad, Hynes & Lerach in Superior Court of the State of
California, County of Santa Clara, against the Company and several of its
current and former officers and directors. The complaint alleges that Symantec
insiders inflated the stock price and then sold stock based on inside
information that sales were not going to meet analysts' expectations. The
complaint seeks damages in an unspecified amount. The complaint has been refiled
twice in state court, most recently on January 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 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's Norton Uninstall Deluxe infringes
CyberMedia's copyright, and asserting related state law claims. The suit
requests damages, injunctive relief, costs and attorneys fees. In May 1998,
CyberMedia filed a motion seeking a preliminary injunction prohibiting sale or
development of the challenged code, which preliminary injunction was granted
with respect to Symantec's domestic activities in September 1998. Subsequently,
Symantec ceased selling the Norton Uninstall Deluxe product. Symantec believes
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 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 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 a total of approximately $6.8 million for damages and legal
costs to Triolet Systems, Inc. and Brian Duncombe in a decade-old copyright
action, for damages arising from the grant of a preliminary injunction against
the defendant. The damages were awarded following the court's ruling that
evidence presented later in the case showed the injunction was not warranted.
Symantec inherited the case through its 1995 acquisition of Delrina Corporation,
which was the plaintiff in this lawsuit. Symantec has appealed the decision.
Symantec recorded a charge of $5.8 million in June 1998 representing the
unaccrued portion of the judgment plus costs.
In March 1997, a class action complaint was filed against Quarterdeck in San
Diego County Superior Court. The case was later transferred to and is currently
pending in Los Angeles County Superior Court. The complaint, purportedly on
behalf of a class of purchasers of Quarterdeck's MagnaRAM2 product, seeks
damages and injunctive relief under the Consumers Legal Remedies Act and
Business and Professions Code sections beginning with 17200 and 17500. Symantec
believes these claims to be without merit and intends to defend itself
vigorously. This case was inherited by Symantec as a result of its recent
acquisition of a majority interest in Quarterdeck (See Note 8 of Notes to
Consolidated Financial Statements in this Form 10-Q).
In October 1997, a complaint was filed in the United States District Court for
the District of Utah on behalf of PowerQuest Corporation against Quarterdeck.
The complaint alleges that Quarterdeck's partitioning software (included in
Partition-It and Partition-It Extra Strength) violates a patent held by
PowerQuest. In January 1998, PowerQuest obtained a second patent relating to
partitioning and has amended its complaint to allege infringement of that patent
as well. The plaintiff seeks an injunction against distribution of Partition-It
and Partition-It Extra Strength and monetary damages. Symantec believes this
action has no merit and intends to defend the lawsuit vigorously. This lawsuit
was inherited by Symantec as a result of its recent acquisition of a majority
interest in Quarterdeck . (See Note 8 of Notes to Consolidated Financial
Statements in this Form 10-Q).
On July 30, 1998, a class action complaint was filed against Quarterdeck in the
Supreme Court of the State of New York, County of New York, on behalf of a
purported class of purchasers of Procomm Plus version 4.0 for Windows product
(the "Product"). The complaint purports to assert claims for breach of warranty
and violation of New York's Consumer Protection From Deceptive Acts and
Practices Act arising from the Product's inability to process dates containing
the year 2000. The complaint seeks unspecified damages. Symantec believes these
claims to be without merit and intends to defend the lawsuit vigorously. This
lawsuit was inherited by Symantec as a result of its recent acquisition of a
majority interest in Quarterdeck. (See Note 8 of Notes to Consolidated Financial
Statements in this Form 10-Q).
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
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SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, repurchased shares are used for employee stock purchase programs
and option grants. The Company completed the repurchase as of October 30, 1998,
repurchasing 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. Of the $56.3
million, approximately $20.8 million was charged to retained earnings after
appropriate amounts were deducted from common stock and capital in excess of
par.
NOTE 8. ACQUISITIONS
Effective May 18, 1998, Symantec entered into a Master Agreement with IBM to
acquire rights to IBM's digital immune technology. In addition, Symantec assumed
the majority of IBM's license arrangements with customers of IBM anti-virus. In
return for the various rights acquired by Symantec from IBM, Symantec agreed to
pay $16 million in installments over a specified period as well as pay royalties
on revenues received by Symantec from distribution of immune-enabled Symantec
products and immune services provided by Symantec using the digital immune
technology. The royalties are subject to specified maximums and vary by time
periods with ultimate termination of royalties as of a specified date. 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 December 31, 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. Under the transaction, Symantec recorded approximately $16.0
million for in-process research and development, $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 was established by a valuation
specialist based on management's estimates. Goodwill and intangibles will be
amortized over 5 years. As of December 31, 1998, the Company incurred
approximately $0.3 million in goodwill amortization expense related to this
asset.
On June 24, 1998, Symantec entered into an agreement whereby Symantec purchased
the operations 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 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 was established by a valuation specialist
based on management's estimates. The capitalized software and intangibles are
being amortized over a 3 year period. As of December 31, 1998, the Company has
incurred approximately $2.8 million of amortization expense related to this
asset.
13
14
SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On September 28, 1998, Symantec entered into an agreement whereby it purchased
Intel Corporation's anti-virus business for approximately $16.5 million.
Symantec also licensed Intel 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
responsibility for support to Symantec by June 1999. In addition, Intel will
promote Norton AntiVirus through its worldwide reseller channels. As of December
31, 1998, Symantec had 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,
$10.7 million for capitalized software technology and $0.8 million for certain
intangible assets. The amount of in-process research and development was
established by a valuation specialist based on management's estimates. The
capitalized software and intangibles are being amortized over a 5 year period.
As of December 31, 1998, the Company has incurred approximately $0.5 million of
amortization expense related to this asset.
On October 15, 1998, Symantec signed a definitive merger agreement to acquire
Quarterdeck. On November 17, 1998, Symantec completed its tender offer for the
common stock of Quarterdeck acquiring an approximately 63% interest. Symantec
intends to acquire Quarterdeck's remaining shares through a cash merger at the
tender offer price of $0.52 per share in accordance with the definitive merger
agreement signed on October 15, 1998. The transaction was accounted for as a
purchase. Under the transaction, Symantec recorded approximately $7.6 million of
acquired in-process research and development, $4.4 million of capitalized
software technology, $45.6 million of goodwill and $1.8 million was allocated to
other intangibles. The amounts included in the Company's financial statements
represent approximately 63% of the total amount Symantec will ultimately record
once the merger is completed. The amount of in-process research and development
was established by a valuation specialist based on management's estimates. As of
December 31, 1998, the Company incurred approximately $0.1 million of
capitalized software amortization expense and $1.1 million of goodwill
amortization expense related to this acquisition. The workforce in place is
being amortized over 2 years. The capitalized software, goodwill and other
intangibles will be amortized over a 5 year period. (See Agreement and Plan of
Merger, dated October 15, 1998, among Symantec, Purchaser, and Quarterdeck filed
with Symantec's Schedule 14D-1 on October 19, 1998). Through its acquisition of
a majority interest in Quarterdeck, Symantec inherited Quarterdeck's 6%
convertible senior subordinated notes("Notes"). Quarterdeck issued $25 million
principal amount of Notes, due 2001, to an institutional investor in a private
placement pursuant to the terms of a Note Agreement dated March 1, 1996. The
Notes are required to be paid in full without any premium upon the earlier of
consummation of the Merger or March 31, 1999.
PRO FORMA. The following unaudited pro forma results of operations for the three
and nine month periods ended December 31, 1998 and 1997 are as if the
acquisition of Binary and Quarterdeck had occurred at the beginning of each
period presented. The pro forma information excludes approximately $7.6 million
and $20.9 million of in-process research and development for the three month and
nine month periods ended December 31, 1998, respectively. 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 Nine Months Ended
December 31, December 31,
---------------------- ----------------------
(In thousands, except per share data; unaudited) 1998 1997 1998 1997
- ------------------------------------------------ -------- -------- -------- --------
Net revenues $165,331 $171,971 $478,159 $486,851
======== ======== ======== ========
Net income $ 17,753 $ 21,714 $ 8,857 $ 38,303
======== ======== ======== ========
Basic net income per share $ 0.32 $ 0.39 $ 0.16 $ 0.69
======== ======== ======== ========
Diluted net income per share $ 0.31 $ 0.36 $ 0.15 $ 0.64
======== ======== ======== ========
14
15
SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 9. SUPPLEMENTAL CASH FLOWS INFORMATION
December 31,
(In thousands; unaudited) 1998
- -------------------------------------------------------------- ------------
Binary
Fair value of assets acquired $ 27,500
========
Cash paid $ 27,500
========
IBM Immune System Technology and anti-virus business
Fair value of assets acquired $ 20,250
========
Expenses incurred $ 1,250
Liabilities assumed 3,000
Current obligation 8,000
Cash paid 8,000
--------
Total $ 20,250
========
Intel's anti-virus business
Fair value of assets acquired $ 16,525
========
Current obligations $ 3,181
Long-term obligations 1,455
Cash paid 11,889
--------
Total $ 16,525
========
Majority Interest in Quarterdeck
Majority Interest in Quarterdeck $ 59,347
========
Expenses incurred $ 518
Net liabilities assumed 28,551
Cash paid 30,278
--------
Total $ 59,347
========
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
15
16
SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 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. In addition, the Company is obligated to comply with certain
financial covenants. Future acquisitions may cause the Company to be in
violation of these financial covenants, at which time the Company will need to
have the covenants amended or waived. On September 22, 1998, an agreement was
entered into, subject to certain closing conditions, 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 with this move,
Symantec would be relieved of responsibility for its lease of WHQ. Due diligence
for the aforementioned exchange was completed on December 15, 1998 and the
parties completed the transaction on February 10, 1999.
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 No. 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 EVENTS
CONVERSION OF OUTSTANDING 7.75% CONVERTIBLE SUBORDINATED DEBENTURES. During the
first week of February 1999, the holders of Symantec's 7.75% convertible
subordinated debentures converted the entire remaining $14.3 million principal
amount into 1,190,332 shares of Symantec common stock. The conversion of these
shares of
16
17
SYMANTEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
common stock were issued in a transaction which was exempt from registration
under the Securities Act of 1933.
LINE OF CREDIT AMENDMENT. As of January 26, 1999, certain covenants under the
Company's $10 million bank line of credit were amended. The line of credit is
available for general corporate purposes. The amendments were effective January
1, 1999. As of January 1, 1999, the Company is in compliance with all covenants
under the Credit Agreement and there were no borrowings and less than $1 million
in 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.
17
18
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 traditional desktop
access through operating systems that 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
could 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 releases of the new operating
systems delay the purchase of Symantec's products, the Company's future net
revenues and operating results could 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
that could decrease demand for certain of the Company's products intended for
Windows 2000, including those currently under development.
18
19
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. Moreover, 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. Shifts 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. In
addition, the Company may face declining sales following Microsoft's
introduction of Windows 2000 (formerly 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 than Symantec,
ranging from desktop to enterprise solutions, and Symantec may not be able to
compete effectively against certain competitors. Any 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 unsuccessful in timely assimilating changes in the
Internet environment into its business operations and product development
efforts, 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 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.
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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 resellers 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.
A significant proportion of the Company's 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 the 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. 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 the rapidly evolving
software distribution channels that leverage the use of 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.
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 decrease 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.
SITE LICENSES. Symantec sells volume license programs (corporate site licenses)
through the distribution channel and through corporate resellers. If the
corporate marketplace grows and becomes a bigger component of the overall
marketplace, the Company may not be successful in expanding this growing
corporate segment.
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 and gaining
presence in new markets, and Symantec may continue to do this 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/or 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 and 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. Such economies of scale may not be realized
in the future.
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. (See Note 8 of Notes to Consolidated Financial Statements in this
Form 10-Q).
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 outside of the United States and 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. Symantec utilizes natural hedging to mitigate
21
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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. The Company
expects that its non-U.S. dollar denominated 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 also subject to other risks common to
international operations, such as political and economic instability, government
regulations, import restrictions, economic volatility, repatriation restrictions
and, in certain jurisdictions, reduced protection for the Company's copyrights
and trademarks, all of which could have an adverse affect on the Company's
operating results.
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 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 and/or 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
22
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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.
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
such disputes and/or litigation in the future. 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 that 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
23
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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. On January 1, 1999 the euro became the common currency
of 11 of the 15 member countries of the European Union. The national currencies
of these 11 countries will coexist with the euro at fixed exchange rates through
December 31, 2001. Euro denominated bills and coins will be introduced on
January 1, 2002, and by July 1, 2002 the national currencies will no longer be
legal tender.
Symantec established a euro task force to address the business implications of
the euro. The task force implemented changes to its system and processes in
order to be euro ready on January 1, 1999. The Company will continue to evaluate
the impact of the euro and expects to make further changes to accommodate doing
business in the euro.
The Company expects the euro will dictate changes in its foreign exchange
hedging program, and this may lead to increased fluctuations in foreign currency
hedging results. Based on current information, the Company does not believe the
euro will have a material adverse impact on its operations or financial
condition.
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 . 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 - PRODUCT DEMAND. With the emerging requirements on Year 2000
compliance and functionality, many enterprise customers may use their
Information Technology (IT) budgets in 1999 to focus on Year 2000 issues and
thus IT organizations may be unwilling to deploy new software until after the
Year 2000. Either of these factors could reduce sales of Symantec products and
could have an adverse affect on revenues.
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.
24
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
The Year 2000 Project is divided into several phases:
Assessment - where the vulnerability of the hardware, software, process or
service element is identified.
Planning - where corrective action is determined for each vulnerable element.
Remediation and Unit Test - where the corrective action is taken and initial
testing is performed.
Limited System Test - where related elements are tested together, using dates
in the vulnerable range.
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.
PHASE AND STATUS OR DUE DATE
------------------------------------------------------------
Limited
SUB-PROJECT Assessment Planning Remediation System Test
- ----------- ---------- -------- ----------- ------------
Business Systems Complete Complete Complete Jan-Jun 1999
Networks, Servers & Communications
Americas and EMEA Complete Complete Jan-Jun 1999 Jul-Dec 1999
Japan & Asia/Pacific March 1999 March 1999 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 Jan-Mar 1999 Mar 1999 Jan-Jun 1999 Jul-Dec 1999
Suppliers and Outside Services Jan-Mar 1999 Mar 1999 Jan-Jun 1999 Jul-Dec 1999
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 the 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.
RISK OF ACCOUNTING TREATMENT. The Company has received requests from the staff
of the Securities and Exchange Commission for additional information regarding
the accounting for certain of its acquisitions, including questions relating to
the write-off of associated in-process research and development costs. The
Company cannot determine at this time the effect, if any, that the outcome of
this matter will have on its reported financial position or results of
operations. However, should the staff of the Securities and Exchange Commission
require the Company to
25
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
retroactively record any adjustments, the effect could have an adverse impact on
the future trading prices of the Company's common stock.
26
27
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 that make customers productive and keep their computers safe
and reliable - anywhere, anytime. These products are developed for multiple
operating platforms.
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 nine months ended December
31, 1998 comprised 39 weeks of revenue and expense activity, while the
comparable prior year period comprised 40 weeks.
RESULTS OF OPERATIONS
During the December 1998 quarter, the Company acquired a majority interest in
Quarterdeck Corporation ("Quarterdeck") (See Note 8 of Notes to Consolidated
Financial Statements in this Form 10-Q). During the September 1998 quarter, the
Company acquired Intel Corporation's ("Intel") anti-virus business (See Note 8
of Notes to Consolidated Financial Statements in this Form 10-Q). During the
June 1998 quarter, the Company acquired International Business Machine's ("IBM")
anti-virus business and the operations of Binary Research Limited ("Binary")
(See Note 8 of Notes to Consolidated Financial Statements in this Form 10-Q).
The results of operations from these acquisitions have been included in
Symantec's results of operations from the date of acquisition.
On January 6, 1999, the Company received a comment letter from the Securities
and Exchange Commission with respect to its Form 10-K for the fiscal year ended
March 31, 1998 and Form 10-Q for the quarter ended October 2, 1998. The comment
letter contained questions related to accounting for certain acquisitions,
including questions relating to the write-off of associated in-process research
and development costs. The Company is in the process of re-evaluating the Binary
and IBM transactions and the related in-process research and development costs
as well as the other questions raised in the comment letter. As a result, final
operating results for the quarters ended June, September and December, 1998 and
the related year-to-date amounts may be restated.
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28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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 Nine Months
Ended Percent Ended Percent
December 31, Change December 31, Change
--------------- in Dollar --------------- in Dollar
(Unaudited) 1998 1997 Amounts 1998 1997 Amounts
---- ---- --------- ---- ---- ---------
Net revenues ............................... 100% 100% 11% 100% 100% 9%
Cost of revenues ........................... 16 15 (18) 15 16 4
---- ---- ---- ----
Gross margin ......................... 84 85 10 85 84 9
Operating expenses:
Research and development ............... 15 15 11 17 16 12
Sales and marketing .................... 43 46 5 46 45 11
General and administrative ............. 6 6 3 7 6 6
In-process research and
development .......................... 5 -- -- 9 -- --
Litigation judgment .................... -- -- -- 1 -- --
Restructuring and other expenses ....... -- -- -- 1 -- --
---- ---- ---- ----
Total operating expenses ............. 69 67 14 81 67 29
---- ---- ---- ----
Operating income ........................... 15 18 (5) 4 17 71
Interest income ............................ 2 2 (19) 2 2 18
Interest expense ........................... -- -- 49 -- -- 26
Other income, net .......................... -- -- 527 1 -- 247
---- ---- ---- ----
Income before income taxes ................. 17 20 (6) 7 19 59
Provision for income taxes ................. 7 5 54 4 5 4
---- ---- ---- ----
Net income ................................. 10% 15% (26) 3% 14% 78
==== ==== ==== ====
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29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
NET REVENUES.
Net revenues were approximately $165 million in the December 1998 quarter, an
increase of 11% from $148 million in the December 1997 quarter. Net revenues
increased 9% to $458 million in the nine-month period ended December 31, 1998
from $422 million in the nine-month period ended December 31, 1997.
Revenues from corporate sales were higher for both the three and nine-month
periods ended December 31, 1998 when compared to the same periods ended December
31, 1997. In addition, revenues were higher in both the three and nine month
periods ended December 31, 1998 over the same periods ended December 31, 1997
due to Symantec's sales growth in Europe. Revenues from retail sales were
somewhat lower in both the three and nine month periods ended December 31, 1998
in comparison to the three and nine month periods ended December 31, 1997,
primarily due to a general softness in the retail markets in the United States.
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 57% and 51% of the Company's total net revenues in the
quarters ended December 31, 1998 and 1997, respectively. The Security and
Assistance business unit comprised approximately 52% and 49% of the Company's
total net revenues in the nine-month periods ended December 31, 1998 and 1997,
respectively. Increased net revenues for the business unit in the comparable
three and nine month periods were primarily related to increased revenues for
two new products, Norton Ghost and the new utility suite, Norton SystemWorks. In
addition, increased sales of Norton AntiVirus for Windows and Norton AntiVirus
for the Macintosh were partially offset by decreases in Norton Utilities for
Windows. The Norton Ghost product was acquired as part of the purchase of Binary
operations 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 35% and 37% of the Company's
total net revenues in the quarters ended December 31, 1998 and 1997,
respectively, and it comprised approximately 36% and 38% of the Company's total
net revenues for the nine months ended December 31, 1998 and 1997, respectively.
Net revenues for the business unit increased in the December 1998 quarter over
the December 1997 quarter, with increases in pcANYWHERE for Windows 95 partially
offset by decreased revenues for ACT! For Windows. Net revenues for the business
unit increased for the nine months ended December 1998, with increases in
pcANYWHERE for Windows 95 and Talkworks being partially offset by decreases in
revenues for ACT! for Windows, WinFax PRO and WinFax Lite.
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 8% and 12% of the Company's total net revenues in the quarters
ended December 31, 1998 and 1997, respectively and 12% and 13% for the nine
month periods ended December 31, 1998 and 1997, respectively. This business
unit's net revenues decreased in the quarter ended December 31, 1998 over the
quarter ended December 31, 1997 due to reductions in revenues from products in
Internet Tools, royalties and from products nearing the end of their life
cycles. The business unit's net revenues increased in the comparable nine month
December periods due to increased product sales in Internet Tools 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 recorded in both the quarters ended December 31,
1998 and 1997, and $36 million and $38 million in the nine month periods ended
December 31, 1998 and 1997, respectively. These royalties and other revenues
primarily relate to the sale of certain software products, technologies and
tangible assets to JetForm Corporation ("JetForm") and the Hewlett-
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Packard Company ("Hewlett-Packard") during fiscal 1997. Royalties from
Hewlett-Packard concluded in the December 1998 quarter.
Payments from JetForm were higher in the three and nine-month periods ended
December 31, 1998 over the three and nine-month periods ended December 31, 1997
primarily due to an 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
approximately the same for both the three month periods ended December 31, 1998
and September 30, 1998. Both December 1998 and September 1998 were lower as
compared to the three month period ended June 30, 1998 and payments are expected
to decline in future periods through the conclusion of the contract in the June
2000 quarter.
INTERNATIONAL. Net revenues from sales outside of North America were $65 million
and $51 million and represented 40% and 34% of total net revenues in the
quarters ended December 31, 1998 and 1997, respectively. The increase in net
revenues was the result of sales growth in Europe, Middle East and Africa
("EMEA") and Japan.
Net revenues from sales outside of North America were $160 million and $132
million and represented 35% and 31% of net revenues in the nine-month periods
ended December 31, 1998 and 1997, respectively. The increase in net revenues was
the result of sales growth in EMEA and Japan.
Foreign exchange rate fluctuations during the three and nine month periods ended
December 31, 1998 compared to the three and nine month periods ended December
31, 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. During the quarter ended
September 30, 1998, the Company implemented a plan to restructure certain of its
operations, which included outsourcing its domestic manufacturing operations.
This outsourcing should be complete by the end of March 1999, and the Company
does not expect any significant impact to its gross margins. (See Note 5 of
Notes to Consolidated Financial Statements).
Gross margin decreased to 84% of net revenues in the three-month period ended
December 31, 1998 from 85% in the three-month period ended December 31, 1997.
Gross margin increased to 85% from 84% in the nine-month periods ended December
31, 1998 and 1997, respectively.
Factors contributing to a decrease in gross margin percentage during the three
month period ended December 31, 1998 compared to the three month period ended
December 31, 1997 include an increase in purchased product rights and
capitalized software amortization from acquisitions and increases in
obsolescence reserves in anticipation of new product releases. Factors
contributing to an increase in gross margin percentage during the nine month
period ended December 31, 1998 compared to the nine month period ended December
31, 1997 include a product mix favoring the Company's higher margin site license
and OEM business and a reduction in royalty expense.
PURCHASED PRODUCT RIGHTS AND CAPITALIZED SOFTWARE. During the December 1998
quarter, Symantec acquired a majority interest in Quarterdeck and recorded
approximately $4 million of purchased product rights and technology as a result
of the transaction. (See Note 8 of Notes to Consolidated Financial Statements).
During the September 1998 quarter, Symantec recorded approximately $11 million
of purchased product rights and technology acquired as part of the Company's
acquisition of Intel's Anti-virus business (See Note 8 of Notes to Consolidated
Financial Statements in this Form 10-Q). During the June 1998 quarter, Symantec
recorded approximately $14 million of purchased product rights and technology
acquired as part of the Company's acquisition of Binary's operations (See Note 8
of Notes to Consolidated Financial Statements in this Form 10-Q).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Amortization of purchased product rights and capitalized software expense,
totaled approximately $2 million in the three month periods ended December 31,
1998. In addition, amortization of purchased product rights and capitalized
software expenses totaled approximately $4 million and $1 million for the nine
month periods ended December 31, 1998 and 1997, respectively. The increases for
the 1998 periods over the 1997 periods are primarily due to additional
amortization related to the purchase of Intel's anti-virus business, and the
acquisitions of Binary and Quarterdeck. Symantec expects purchased product
rights and capitalized software amortization to increase in future periods
through March 31, 1999. The amortization will occur over the next 3 to 5 years.
(See Note 8 of Notes to Consolidated Financial Statements in this Form 10-Q).
RESEARCH AND DEVELOPMENT EXPENSES.
Research and development expenses were 15% of net revenues for both the three
month periods ended December 31, 1998 and 1997 and 17% and 16% of net revenues
for the nine month periods ended December 31, 1998 and 1997. Research and
development expenses are charged to operations as incurred.
Research and development expenses increased 11% to $24 million in the December
1998 quarter from $22 million in the December 1997 quarter and increased 12% to
$75 million in the nine month period ended December 31, 1998 from $67 million in
the nine month period ended December 31, 1997. For both the three and nine month
periods the increase was primarily due to legal expenses related to product
claims (See Note 6 of the Notes to Consolidated Financial Statements in this
Form 10-Q) and growth in employee related expenses.
SALES AND MARKETING EXPENSES.
Sales and marketing expenses were 43% and 46% of net revenues in the three month
periods ended December 31, 1998 and 1997 and 46% and 45% of net revenues in the
nine month periods ended December 31, 1998 and 1997, respectively. Sales and
marketing expenses were approximately $72 million and $68 million for the three
months ended December 31, 1998 and 1997, respectively, and $212 million and $191
million for the nine months ended December 31, 1998 and 1997. The increase in
sales and marketing expenses in both the three and nine month comparable
December periods is due to increases in employee related expenses and
advertising and promotion expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses were 6% of net revenues for both the three
month periods ended December 31, 1998 and 1997 and were approximately 7% and 6%
of net revenues for the nine month periods ending December 31, 1998 and 1997,
respectively. General and administrative expenses were approximately $10 million
for both three month periods ended December 31, 1998 and 1997. General and
administrative expenses increased 6% to approximately $29 million in the nine
month period ended December 31, 1998 from $28 million in the nine month period
ended December 31, 1997. The increase in general and administrative expenses is
primarily related to employee related expenses.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES.
In May 1998, the Company entered into an agreement with IBM for their immune
system technology and related anti-virus patents. The agreement was accounted
for as a purchase and paid for with cash. The Company recorded intangible assets
of prepaid research and development, customer base, goodwill, and in-process
research and development. The company wrote-off the in-process research and
development as of the date of the purchase and is amortizing the value of
prepaid R&D over 1 year. The value of both the goodwill and customer base is
being amortized over 5 years. (See Note 8 of the Notes to Consolidated Financial
Statements in this Form 10-Q).
In June 1998 the Company acquired the operations of Binary. The acquisition was
accounted for as a purchase and paid for with cash. The Company recorded
intangible assets of developed software, workforce in place and in-
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
process research and development as of the date of the acquisition. The Company
wrote off the in-process research and development at the time of the purchase,
and the value of the workforce in place and developed software is being
amortized over 3 years. (See Note 8 of the Notes to Consolidated Financial
Statements in this Form 10-Q).
In September 1998 the Company entered into an agreement with Intel to purchase
their anti-virus business, as well as license their systems management
technology. The agreement was accounted for as a purchase and paid for with
cash. The Company recorded intangible assets of developed software, customer
base and in-process research and development as of the date of the acquisition.
The Company wrote off the in-process research and development at the time of the
purchase, and the value of the customer base and developed software is being
amortized over 5 years. (See Note 8 of the Notes to Consolidated Financial
Statements in this Form 10-Q).
In November 1998 the Company successfully completed a tender offer for the
common stock of Quarterdeck and obtained 63% of the outstanding shares. The
Company expects to acquire the remaining shares through a cash merger at a
future date during a Quarterdeck shareholders' meeting. The acquisition is being
accounted for as a purchase and the Company intends to pay cash for the
remaining interest. The Company recorded intangible assets of developed
software, tradename, customer base, goodwill, workforce in place, and in-process
research and development. The Company wrote off the in-process research and
development at the time of the purchase and is amortizing the value of the
workforce in place over 2 years. The value of the remaining intangibles,
developed software, tradename, customer base and goodwill are all to be
amortized over 5 years. (See Note 8 of the Notes to Consolidated Financial
Statements in this Form 10-Q).
The following table outlines the value of the above referenced intangible assets
(in thousands):
Allocated Purchase Price Components
--------------------------------------------------------------------------------------------------
Purchase In-Process Developed Customer Prepaid
Price R&D Software Goodwill Base Workforce Tradename R&D
-------- ---------- --------- -------- -------- --------- --------- -------
IBM $20,250 $16,000 -- $ 2,950 $100 -- -- $1,200
Binary $27,871 $13,325 $14,435 -- -- $111 -- --
Intel $16,525 $ 5,017 $10,697 -- $811 -- -- --
Quarterdeck $59,347 $ 7,560 $ 4,410 $45,588 $882 $ 25 $882 --
The Company wrote-off $41.9 million in in-process research and development
associated with the IBM, Binary, Intel and Quarterdeck purchases. These
write-offs were necessary because the acquired technologies had not yet reached
technological feasibility and had no future alternative uses. The Company is
using the acquired in-process research and development associated to create new
anti-virus products and enhanced management and administrative capabilities to
be integrated into the Company's suite of anti-virus offerings and other
corporate products over the next 2 years. The in-process technology will also be
used to create new Uninstall and Disk Cloning products.
The nature of the efforts required to develop the purchased in-process
technology principally relate to the completion of all planning, designing,
development and testing activities that are necessary to establish that the
product or service can be produced to meet its design specifications including
features, functions and performance. The Company expects the acquired in-process
technology to be developed into commercially feasible products, however , there
are no assurances that this will occur. Failure to complete these products in
their entirety, or in a timely manner could have a material adverse impact on
the Company's operating results, financial condition and results of operations.
Additionally, the value of the other intangible assets may become impaired.
The fair value of the in-process technology for each of the purchases was
determined by estimating the projected cash flows related to such projects,
including cost to complete the development of in-process technology and future
revenues to be earned upon commercialization of the products. The resulting cash
flows were discounted back to
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
their net present values. The net cash flows from such projects were based on
management's analysis of the respective markets, and estimates of revenues and
operating profits related to such projects.
IBM
The in-process technology acquired in the IBM purchase primarily consisted of
the IBM immune system technology and related anti-virus patents. This technology
will detect previously unknown viruses, analyze them, and distribute a cure, all
automatically and faster than existing methods. The technology is to be
integrated into the Company's suite of anti-virus products throughout 1999,
along with a considerable amount of infrastructure enhancement required for
deployment.
Revenue attributable to the in-process technology was assumed to increase
substantially during the first year, and then decrease at rates of 35% to 8%
during the remaining three years of the four year projection. Projected annual
revenues range from $38.1 million to $19.5 million over the term of the
projection. These projections were based on penetration into Symantec's and
IBM's existing installed base of customers, anticipated growth rates of the
anti-virus markets, an accelerated growth of new customers during the first year
of delivering immune system technology, and the estimated life of the underlying
technologies.
Marketing and sales expenses, expressed as a percentage of revenue, for the
in-process technology, were estimated to be 40% throughout the valuation period
based on the Company's historical experience with similar products. General and
administrative expenses were estimated to be 7% throughout the period of
analysis and are supported by the Company's historical general and
administrative expenses.
Operating profit was projected to increase from a loss of $1.8 million during
1998 to income of $13.9 million in 1999, the first year revenue is earned on the
technology. Operating profits then decrease at rates of 4% to 35% over the
remaining three years resulting in operating profits of $13.3 million to $7.4
million. Operating profit declines less than revenue in the early years of the
projection because most product development costs were assumed to be incurred in
the first year, reducing operating expenses as a percentage of revenue in later
years. To date, operating expenses and revenues attributable to in-process
technologies associated with the IBM purchase are consistent with management's
projections.
The Company used a discount rate of 30% for valuing the in-process technology
from IBM, which the Company believes reflected the risk associated with the
completion of these research and development projects and the estimated future
economic benefits to be generated subsequent to their completion. This discount
rate is higher than Symantec's Weighted Average Cost of Capital ("WACC") of 17%
due to the fact that the technology had not reached technological feasibility as
of the date of the valuation.
BINARY
The in-process technology acquired in the Binary acquisition primarily consisted
of disk cloning technologies associated with Ghost, the flagship product of
Binary. Ghost software can create a complete image of a hard drive in the form
of a single file, which can be copied to another computer connected via a
network.
Revenue attributable to Binary's in-process technology was assumed to increase
in the first three years of the five year projection period at annual rates
ranging from 724% to 65%, decreasing at rates of 3% to 70% over the remaining
periods as other technologies enter the marketplace. Projected annual revenues
range from $2.4 million to $33.1 million over the projected period. These
estimates were based on aggregate growth rates for the business on a whole,
individual product revenues, anticipated product development cycles, and the
life of the underlying technology.
Marketing and sales expenses, expressed as a percentage of revenue, for the
in-process technology, were estimated to be 30% throughout the valuation period
for the disk cloning products, and 40% for other revenue streams which is based
on the Company's historical experience with similar products. General and
administrative expenses were
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
estimated to be 7% throughout the period of analysis and are supported by the
Company's historical general and administrative expenses.
Operating profit was projected to increase from a loss of $1.2 million during
the first year to a profit of $15.9 million during the third year. Operating
profits then decrease from 3% to 70% during the remaining two years resulting in
profits of $15.3 million and $4.7 million. Operating profit increases faster
than revenue in the early years because most product development costs were
assumed to be incurred in the first year, reducing operating expenses as a
percentage of revenue in later years. To date, operating expenses and revenues
attributable to in-process technologies associated with the Binary purchase are
consistent with management's projections.
The Company used a discount rate of 30% for valuing the in-process technologies
from Binary, which the Company believes reflected the risk associated with the
completion of these research and development projects and the estimated future
economic benefits to be generated subsequent to their completion. This discount
rate is higher than Symantec's WACC of 17% due to the fact that the technology
had not reached technological feasibility as of the date of the valuation.
INTEL
The in-process technology acquired in the Intel purchase consists of the LANDesk
anti-virus technology which resides in the LANDesk virus protect product line,
LDVP. The LDVP product offers centrally managed virus protection to computer
networks. The Company intends to initially sell the next version of LDVP
software on a standalone basis. During 1999 the Company anticipates the
technology will be integrated into the Company's suite of corporate anti-virus
offerings, in addition to future corporate products.
Revenue attributable to Intel's in-process technology was assumed to be $12.2
million during the first year, increasing to $12.7 million during the second
year, and declining at annual rates ranging from 35% to 77% during the remaining
three years of the five year projection as other technologies enter the
marketplace. Projected annual revenues range from $12.7 million to $0.8 million
over the projected period. These estimates were based on revenue estimates of
the acquired LDVP business, aggregate growth rates for the anti-virus business
on a whole, anticipated revenue to be earned from future corporate product
offerings, anticipated product development cycles, and the life of the
underlying technology.
Marketing and sales expenses, expressed as a percentage of revenue, for the
in-process technology, were estimated to be 43% throughout the valuation period
based on the Company's historical experience with similar products. General and
administrative expenses were estimated to be 8% throughout the period of
analysis and are supported by the Company's historical general and
administrative expenses.
Operating profit was assumed to be $4.9 million during the first year,
increasing by 7% during the second year, and declining at annual rates ranging
from 34% to 77% during the remaining periods, resulting in annual operating
profits ranging between $5.3 million and $0.3 million. The operating profit
projections during the early years assumed a growth rate slightly higher than
revenue projections. The higher growth rate is attributable to the increase in
revenues discussed above as the technology is integrated more deeply into the
Company's product offerings, while research costs remain constant. To date,
operating expenses and revenues attributable to in-process technologies
associated with the Intel purchase are consistent with management's projections.
Estimated costs to be incurred to reach technological feasibility of in-process
technologies from Intel as of the date of the product being delivered to
Symantec totaled $0.5 million. The in-process technology was estimated to be
88.1% complete at this time. The projected introduction dates of acquired
in-process technologies is early/mid 1999.
The Company used a discount rate of 30% for valuing the in-process technology
from Intel, which the Company believes reflected the risk associated with the
completion of these research and development projects and the estimated future
economic benefits to be generated subsequent to their completion. This discount
rate is higher than
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35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Symantec's WACC of 17% due to the fact that the technology had not reached
technological feasibility as of the date of the valuation.
QUARTERDECK
The in-process technology acquired with Quarterdeck consisted of projects
related to Quarterdeck's CleanSweep product line. The CleanSweep product line is
designed to enhance the performance of the Windows operating system by finding
and removing outdated, unnecessary, or unwanted files, applications, and system
components, thereby freeing up disk space.
Revenue attributable to the in-process technology was assumed to be $23.7
million during the first year and declining at annual rates of 5% to 65% during
the remaining periods of the six year projection period as other technologies
are released into the marketplace. Projected annual revenues range from $23.7
million to $2.9 million over the projected period. These projections were based
on aggregate revenue estimates for the business as a whole, anticipated revenue
derived from the Company being able to increase our penetration in the uninstall
market, anticipated growth rates in the utilities suites markets, anticipated
product development cycles, and the life of the underlying technology.
Overall sales, marketing, and general and administrative expenses were estimated
to be 30% throughout the valuation period based on indications from similar
companies.
Operating profit was assumed to be $10.9 million during the first year,
increasing by 1% during the second year, and declining at annual rates ranging
from 17% to 69% during the remaining periods, resulting in annual operating
profits ranging between $11 million and $1.4 million. Operating profit in early
years increases as revenue declines because most product development costs were
assumed to be incurred in the first year, reducing operating expenses as a
percentage of revenue in later years.
Estimated costs to be incurred to reach technological feasibility as of the date
of acquisition for Quarterdeck in-process technologies totaled $0.7 million. The
in-process technology was estimated to be 80% complete as of the date of the
acquisition. The projected introduction dates of acquired in-process
technologies is early/mid 1999.
The Company used a discount rate of 20% for valuing the in-process technology
from Quarterdeck, which the Company believes reflected the risk associated with
the completion of these research and development projects and the estimated
future economic benefits to be generated subsequent to their completion. This
discount rate reflects a premium above that of the risk associated with the
acquired developed technology, and is higher than the Company's WACC.
LITIGATION JUDGMENT.
Litigation judgment expenses totaled approximately $6 million in the nine month
period ended December 31, 1998. These expenses related to a judgment by a
Canadian court on a decade-old copyright action assumed by Symantec as a result
of the acquisition of Delrina Corporation (See Note 6 of Notes to Consolidated
Financial Statements in this Form 10-Q).
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36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESTRUCTURING AND OTHER EXPENSES.
During the quarter ended September 30, 1998, the Company implemented a plan to
restructure certain of its operations, which included outsourcing its domestic
manufacturing operations. As a result, it recorded approximately $4 million for
personnel severance to reduce the workforce by approximately 5% in both domestic
and international operations and approximately $1 million for the planned
abandonment of a manufacturing facility lease. As of December 31, 1998,
approximately $3 million of the $5 million had been incurred. These activities
will be substantially completed by the end of March 1999.
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME.
Interest income was approximately $2.7 million and $3.3 million for the three
month periods ended December 31, 1998 and 1997, respectively. Interest income
decreased 19% in the three month period ended December 31, 1998 over the three
month period ended December 31, 1997 primarily due to a lower average invested
cash balance and losses on the sale of investments.
Interest income was approximately $11 million and $9 million in the nine month
periods ended December 31, 1998 and 1997, respectively. Interest income
increased 18% in the nine month period ended December 31, 1998 over the nine
month period ended December 31, 1997 primarily due to a higher average invested
cash balance, gains on the sale of investments and interest income received with
income tax refunds.
Interest expense was approximately $0.5 million and $0.3 million in the three
month periods ended December 31, 1998 and 1997, and $1.1 million and $0.9
million for the nine month periods ended December 31, 1998 and 1997,
respectively. Interest expense principally relates to Symantec's and
Quarterdeck's convertible subordinated debentures.
Other income was approximately $0.4 million and $0.1 million in the three month
periods ended December 31, 1998 and 1997, respectively, and $2.5 million and
$0.7 million in the nine month periods ended December 31, 1998 and 1997,
respectively. Other income increased in the three month period ended December
31, 1998 compared to the three month period ended December 31, 1997 due to
foreign currency exchange gains from fluctuations in currency exchange rates.
Other income increased in the nine month period ended December 31, 1998 compared
to the nine month period ended December 31, 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 nine
months periods ended December 31, 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 nine months
periods ended December 31, 1997 were 25% and 24%, respectively.
The tax provision for the nine month period ended December 31, 1998 consists of
two items: 1) a $24 million (or 32% effective tax rate) provision on income
before income taxes of $75 million (which excludes a $42 million charge for
acquired in-process research and development expenses) and 2) a $5 million tax
benefit on the $42 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 $69 million to
$191 million at December 31, 1998 from $260 million at March 31, 1998. This
decrease was largely due to the repurchase of approximately 2.9 million shares
of Symantec common stock for approximately $56 million during the September and
December 1998
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37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
quarters. In addition, portions of the decrease were due to the acquisition of
Binary for approximately $28 million, an $8 million payment to IBM during the
quarter ended June 30, 1998, an approximately $12 million payment to Intel and a
$30 million payment for the tendered shares of Quarterdeck during the quarter
ended December 31, 1998 (See Notes 8 of Notes to Consolidated Financial
Statements in this Form 10-Q).
In addition to cash, short-term investments and long-term investments of $192
million, the Company has $69 million of restricted investments related to
collateral requirements under certain lease agreements entered into during
fiscal 1997. In accordance with the lease terms, these funds are not available
to meet operating cash requirements. 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 addition, the Company
is obligated to comply with certain financial covenants. Future acquisitions may
cause the Company to be in violation of these financial covenants, at which the
time the Company will need to have the covenants amended or waived. On September
22, 1998, an agreement was entered into, subject to certain closing conditions,
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 with this move, Symantec would be relieved of responsibility for its
lease of WHQ. Due diligence for the aforementioned exchange was completed on
December 15, 1998 and the parties completed the transaction on February 10,
1999.
On October 15, 1998, Symantec signed a definitive merger agreement to acquire
Quarterdeck. On November 17, 1998, Symantec completed its tender offer for the
common stock of Quarterdeck acquiring approximately 63% interest. Symantec
intends to acquire Quarterdeck's remaining shares through a cash merger at the
tender offer price of $0.52 per share in accordance with the definitive merger
agreement signed on October 15, 1998. The transaction was accounted for as a
purchase. Under the transaction, Symantec recorded approximately $7.6 million of
acquired in-process research and development, $4.4 million of capitalized
software technology, $45.6 million of goodwill and $1.8 million was allocated to
other intangibles. The amounts included in the Company's financial statements
represent approximately 63% of the total amount Symantec will ultimately record
once the merger is completed. The amount of in-process research and development
was established by a valuation specialist based on management's estimates. As of
December 31, 1998, the Company incurred approximately $0.1 million of
capitalized software amortization expense and $1.1 million of goodwill
amortization expense related to this acquisition. The capitalized software and
goodwill will amortized over a 5 year period. (See Agreement and Plan of Merger,
dated October 15, 1998, among Symantec, Purchaser, and Quarterdeck filed with
Symantec's Schedule 14D-1 on October 19, 1998).
Through its acquisition of a majority interest in Quarterdeck, Symantec
inherited Quarterdeck's 6% convertible senior subordinated notes. Quarterdeck
issued $25 million principal amount of 6% convertible senior subordinated notes,
due 2001 ("Notes"), to an institutional investor in a private placement pursuant
to the terms of a Note Agreement dated March 1, 1996. The Notes are required to
be paid in full without any premium upon the earlier of consummation of the
Merger or March 31, 1999.
Net cash provided by operating activities was approximately $86 million for the
nine months ended December 31, 1998 and was comprised of the Company's net
income of approximately $13 million, offset by non-cash related expenses of
approximately $63 million and a net decrease in assets and liabilities,
excluding effects of acquisitions, of approximately $10 million.
Net trade accounts receivable decreased $3 million to $62 million at December
31, 1998 from $65 million at March 31, 1998. Days sales outstanding was 34 days
at December 31, 1998 and 38 days at March 31, 1998. The decrease in days sales
outstanding is due to an increase in quarter end collections in the December
1998 quarter.
On June 9, 1998, the Board of Directors of Symantec authorized the repurchase of
up to 5% of Symantec's
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
outstanding common stock before December 31, 1998. Among other purposes,
repurchased shares are used for employee stock purchase programs and option
grants. The Company completed the repurchase as of October 31, 1998,
repurchasing 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. Of the $56.3
million, approximately $20.8 million was charged to retained earnings after
appropriate amounts were deducted from common stock and capital in excess of
par.
Effective January 1, 1999, certain covenants under the $10 million line of
credit agreement were amended. As of January 1, 1999, the Company is in
compliance with all covenants under the Credit Agreement and 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 11 of this
Form 10-Q.
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 Amendment No. 1 of Agreement for exchange and purchase and escrow
instructions, dated as of November 4, 1998 between Symantec
Corporation and TST Development, L.L.C.
10.02 Amendment No. 2 of Agreement for exchange and purchase and escrow
instructions, dated as of November 20, 1998 between Symantec
Corporation and TST Development, L.L.C.
10.03 Amendment No. 3 of Agreement for exchange and purchase and escrow
instructions, dated as of December 4, 1998 between Symantec
Corporation and TST Development, L.L.C.
10.04 Amendment No. 4 of Agreement for exchange and purchase and escrow
instructions, dated as of December 15, 1998 between Symantec
Corporation and TST Development, L.L.C.
27.01 Financial Data Schedule for the Nine Months Ended December 31, 1998.
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on December 1, 1998, reporting the
merger agreement on October 15, 1998 between Symantec Corporation and
Quarterdeck Corporation, which includes as Exhibit 2.01 the Agreement and Plan
of Merger dated as of October 15, 1998 by among Symantec Corporation, Oak
Acquisition Corporation and Quarterdeck Corporation.(incorporated by reference
to Exhibit c(1) to the Registrant's Schedule 14D-1 (Commission File No. 5-45153)
initially filed on October 19, 1998).and Exhibit 99.01 the license agreement
dated as of October 15, 1998 by and between Symantec Corporation and Quarterdeck
Corporation. (incorporated by reference to Exhibit c(2) to the Registrant's
Schedule 14D-1 (Commission File No. 5-45153) initially filed on October 19,
1998).
ITEMS 2, 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: February 12, 1999 SYMANTEC CORPORATION
By /s/ GORDON E. EUBANKS, JR.
-----------------------------------------
Gordon E. Eubanks, Jr.
President and Chief Executive Officer
(duly authorized officer)
/s/ GREGORY E. MYERS
-----------------------------------------
Gregory E. Myers
Vice President Finance
(duly authorized officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.01 Amendment No. 1 of Agreement for exchange and purchase and
escrow instructions, dated as of November 4, 1998 between
Symantec Corporation and TST Development, L.L.C.
10.02 Amendment No. 2 of Agreement for exchange and purchase and
escrow instructions, dated as of November 20, 1998 between
Symantec Corporation and TST Development, L.L.C.
10.03 Amendment No. 3 of Agreement for exchange and purchase and
escrow instructions, dated as of December 4, 1998 between
Symantec Corporation and TST Development, L.L.C.
10.04 Amendment No. 4 of Agreement for exchange and purchase and
escrow instructions, dated as of December 15, 1998 between
Symantec Corporation and TST Development, L.L.C.
27.01 Financial Data Schedule for the Nine Months Ended December 31,
1998.