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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
JULY 2, 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 1,622,921 shares of Delrina exchangeable stock, as
of July 30, 1999:
COMMON STOCK, PAR VALUE $0.01 PER SHARE 56,800,780 SHARES
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SYMANTEC CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED JULY 2, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 1999 and March 31, 1999 ...................... 3
Condensed Consolidated Statements of Income
for the three months ended June 30, 1999 and 1998 ........... 4
Condensed Consolidated Statements of Cash Flow
for the three months ended June 30, 1999 and 1998 ........... 5
Notes to Condensed Consolidated Financial Statements ............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 27
Item 6. Exhibits and Reports on Form 8-K ................................. 27
Signatures ................................................................ 28
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
(In thousands) 1999 1999
- ---------------------------------------------------------------------- ------- -------------
(unaudited)
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 219,842 $ 192,755
Trade accounts receivable 60,447 76,386
Inventories 6,357 6,377
Deferred income taxes 28,190 28,155
Other 10,900 12,790
--------- ---------
Total current assets 325,736 316,463
Long-term investments -- 4,270
Restricted investments 73,288 71,405
Equipment and leasehold improvements, net 53,829 52,887
Purchased product rights and capitalized software, net 34,296 36,209
Goodwill, net 68,989 75,224
Other 9,490 7,018
--------- ---------
$ 565,628 $ 563,476
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,785 $ 45,862
Accrued compensation and benefits 21,212 20,788
Deferred revenue 69,132 55,965
Other accrued expenses 58,822 75,954
Income taxes payable 15,485 18,339
--------- ---------
Total current liabilities 204,436 216,908
Long-term obligations 1,091 1,455
Commitments and contingencies
Stockholders' equity:
Preferred stock (authorized: 1,000; issued and outstanding: none) -- --
Common stock (authorized: 100,000; issued and outstanding: 56,515
and 56,872 shares) 565 569
Capital in excess of par value 316,099 315,698
Notes receivable from stockholders (24) (144)
Unearned compensation (1,164) --
Retained earnings 63,683 48,100
Accumulated other comprehensive loss (19,058) (19,110)
--------- ---------
Total stockholders' equity 360,101 345,113
--------- ---------
$ 565,628 $ 563,476
========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
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SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
June 30,
------------------------
(In thousands, except per share data; unaudited) 1999 1998
- --------------------------------------------------- --------- ---------
Net revenues $ 175,138 $ 137,770
Cost of revenues 30,623 20,283
--------- ---------
Gross margin 144,515 117,487
Operating expenses:
Research and development 27,572 24,979
Sales and marketing 73,523 69,841
General and administrative 8,786 9,132
Amortization of goodwill and other intangibles 4,115 277
Restructuring and other expenses 2,773 --
Acquired in-process research and development -- 14,148
Litigation judgment -- 5,825
--------- ---------
Total operating expenses 116,769 124,202
--------- ---------
Operating income (loss) 27,746 (6,715)
Interest income 2,247 4,489
Interest expense (27) (331)
Income, net of expense, from sale of technologies
and product lines 4,890 15,321
Other income, net 608 2,602
--------- ---------
Income before income taxes 35,464 15,366
Provision for income taxes 11,737 7,751
--------- ---------
Net income $ 23,727 $ 7,615
========= =========
Net income per share - basic $ 0.42 $ 0.13
========= =========
Net income per share - diluted $ 0.41 $ 0.13
========= =========
Shares used to compute net income per share - basic 56,360 57,422
========= =========
Shares used to compute net income per share - diluted 58,284 60,160
========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
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SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended
June 30,
------------------------
(In thousands; unaudited) 1999 1998
- ----------------------------------------------------------------------------- --------- ---------
Operating Activities:
Net income $ 23,727 $ 7,615
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of equipment and
leasehold improvements 5,735 6,433
Amortization and write-off of capitalized software costs 2,313 643
Amortization of goodwill 3,935 275
Write-off of acquired in-process research and development -- 14,148
Deferred income taxes 227 (1,693)
Net change in assets and liabilities, excluding effects of acquisitions:
Trade accounts receivable 14,068 3,570
Inventories (84) (385)
Other current assets 1,725 4,175
Other assets (1,493) 13
Accounts payable (5,472) 1,047
Accrued compensation and benefits 562 (2,467)
Other accrued expenses and deferred revenue 13,402 4,611
Income taxes payable (2,357) (6,104)
--------- ---------
Net cash provided by operating activities 56,288 31,881
--------- ---------
Investing Activities:
Capital expenditures (7,149) (7,206)
Purchased intangibles (400) (376)
Purchase of IBM's anit-virus business -- (8,000)
Purchase of Binary Research Limited's operations -- (27,500)
Cash paid to Quarterdeck shareholders (16,394) --
Purchases of marketable securities (20,000) (84,225)
Proceeds from sales of marketable securities 39,598 79,942
Purchases of long-term, restricted investments (1,883) (3,816)
Proceeds from sales of long-term investments 4,270 --
--------- ---------
Net cash used in investing activities (1,958) (51,181)
--------- ---------
Financing Activities:
Principal payments on long-term obligations (364) --
Repurchase of common stock (18,724) --
Net proceeds from sales of common stock and other 9,814 9,821
--------- ---------
Net cash (used in) provided by financing activities (9,274) 9,821
--------- ---------
Effect of exchange rate fluctuations on cash and cash equivalents 592 (4,464)
--------- ---------
Increase (decrease) in cash and cash equivalents 45,648 (13,943)
Beginning cash and cash equivalents 153,873 139,013
--------- ---------
Ending cash and cash equivalents $ 199,521 $ 125,070
========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Symantec Corporation
("Symantec" or the "Company") as of June 30, 1999, and for the three months
ended June 30, 1999 and 1998, are unaudited and, in the opinion of management,
contain all adjustments, consisting of only normal recurring items necessary for
the fair presentation of the financial position and results of operations for
the interim periods. These condensed consolidated financial statements should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
included in Symantec's Annual Report on Form 10-K for the year ended March 31,
1999. The results of operations for the three months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the entire year. All
significant intercompany accounts and transactions have been eliminated. Certain
previously reported amounts have been reclassified to conform to the current
presentation format. For the June 1998 quarter, certain amounts have been
restated and reclassified as a result of a comment letter received by the
Company from the Securities and Exchange Commission, as mentioned in the
Company's Form 10-K for the year ended March 31, 1999.
Symantec has a 52/53-week fiscal accounting year. Accordingly, all references as
of and for the periods ended June 30, 1999, March 31, 1999 and June 30, 1998
reflect amounts as of and for the periods ended July 2, 1999, April 2, 1999 and
July 3, 1998, respectively. The June 30, 1999 and 1998 quarters comprised 13
weeks of activity.
During the June 1998 quarter, the Company acquired certain assets of
International Business Machines (IBM) and Binary Research Limited (Binary) (See
Note 8 of Notes to Condensed Consolidated Financial Statements in this Form
10-Q.) The results of operations from the acquired IBM assets and of Binary have
been included in Symantec's results of operations from their respective dates of
acquisitions.
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. BALANCE SHEET INFORMATION
June 30, March 31,
(In thousands) 1999 1999
- ---------------------------------------------------------- --------- ---------
(unaudited)
Cash, cash equivalents and short-term investments:
Cash $ 65,229 $ 41,031
Cash equivalents 134,292 112,842
Short-term investments 20,321 38,882
--------- ---------
$ 219,842 $ 192,755
========= =========
Trade accounts receivable:
Receivables $ 65,154 $ 81,332
Less: allowance for doubtful accounts (4,707) (4,946)
--------- ---------
$ 60,447 $ 76,386
========= =========
Inventories:
Raw materials $ 2,653 $ 1,887
Finished goods 3,704 4,490
--------- ---------
$ 6,357 $ 6,377
========= =========
Equipment and leasehold improvements, net:
Computer hardware and software $ 139,565 $ 134,745
Office furniture and equipment 34,386 33,705
Leasehold improvements 23,107 22,516
--------- ---------
197,058 190,966
Less: accumulated depreciation and amortization (143,229) (138,079)
--------- ---------
$ 53,829 $ 52,887
========= =========
Purchased product rights and capitalized software, net:
Purchased product rights and technologies $ 47,583 $ 47,181
Capitalized software development costs 2,393 2,377
Less: accumulated amortization of purchased product rights (13,377) (11,112)
Less: accumulated amortization of capitalized software costs (2,303) (2,237)
--------- ---------
$ 34,296 $ 36,209
========= =========
Goodwill, net:
Goodwill $ 79,100 $ 81,400
Less: accumulated amortization (10,111) (6,176)
--------- ---------
$ 68,989 $ 75,224
========= =========
Accumulated other comprehensive loss:
Unrealized loss on available-for-sale investments $ (134) $ (304)
Cumulative translation adjustment (18,924) (18,806)
--------- ---------
$ (19,058) $ (19,110)
========= =========
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3. NET INCOME PER SHARE
The components of net income per share are as follows:
Three Months Ended
June 30,
----------------------
(In thousands, except per share data; unaudited) 1999 1998
- ------------------------------------------------- ------- -------
BASIC NET INCOME PER SHARE
Net income $23,727 $ 7,615
======= =======
Weighted average number of common
shares outstanding during the period 56,360 57,422
======= =======
Basic net income per share $ 0.42 $ 0.13
======= =======
DILUTED NET INCOME PER SHARE
Net income $23,727 $ 7,615
======= =======
Weighted average number of common
shares outstanding during the period 56,360 57,422
Shares issuable from assumed exercise
of options 1,924 2,738
------- -------
Total shares for purpose of calculating
diluted net income per share 58,284 60,160
======= =======
Diluted net income per share $ 0.41 $ 0.13
======= =======
For the three months ended June 30, 1999, there were no convertible subordinated
debentures outstanding. For the three months ended June 30, 1998, 1,190,000
shares of convertible subordinated debentures and $169,000 of interest expense
were excluded from the computation of diluted net income per share because the
effect would have been anti-dilutive.
NOTE 4. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three Months Ended
June 30,
----------------------
(In thousands; unaudited) 1999 1998
- ---------------------------------------------------------------------------- -------- -------
Net income $ 23,727 $ 7,615
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments,
net of a tax provision of $72 and $60 152 128
Reclassification adjustment for losses (gains) included in net income,
net of a tax (benefit) provision of ($8) and $84 18 (177)
Cumulative translation adjustment (CTA),
net of a tax benefit of $56 and $650 (118) (3,948)
-------- --------
Total other comprehensive income (loss) 52 (3,997)
-------- --------
Comprehensive income $ 23,779 $ 3,618
======== ========
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 5. RESTRICTED STOCK
In May 1999, the Company issued 100,000 shares of restricted common stock to its
new CEO. Unearned compensation equivalent to the market value of the common
stock on the date of grant was charged to stockholders' equity and will
subsequently be amortized over 2 years, the vesting period of the restricted
common stock. For the three months ended June 30, 1999, the Company recorded
approximately $135,000 of expense, relating to the restricted common stock.
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. On January 7, 1997, the same
plaintiffs filed a complaint in the United States District Court, Northern
District of California, based on the same facts as the state court complaint,
for violation of the Securities Exchange Act of 1934. The district court
dismissed that complaint and plaintiffs served an amended complaint in April
1998. Symantec's motion to dismiss the new federal complaint was granted in
part, substantially narrowing the complaint. In July 1999, the parties reached
an agreement in principle to conclude this case on terms that would have no
material financial impact on the Company. The parties expect to finalize the
agreement and submit it to the Court for preliminary approval in August 1999. As
of June 30, 1999, the Company believes it has adequately accrued for the
settlement and related legal costs.
On April 23, 1997, Symantec filed a lawsuit against McAfee Associates, Inc.,
which pursuant to a merger has become Network Associates, Inc. (Network
Associates), in the United States District Court, Northern District of
California, for copyright infringement and unfair competition. On October 6,
1997, the court found that Symantec had demonstrated a likelihood of success on
the merits of certain copyright claims and issued a preliminary injunction (i)
prohibiting Network Associates from infringing Symantec's rights in specified
materials by marketing, selling, transferring or directly or indirectly copying
into any new Network Associates product or new version of an existing product
that has Symantec code, (ii) requiring Network Associates to notify distributors
who are still selling versions of PC Medic 97 that have Symantec's code to tell
customers that they should upgrade to versions that do not contain Symantec code
and (iii) requiring Network Associates to provide Symantec and the court with a
sample of the notice to be used. On October 17, 1997, Symantec amended its
complaint to include additional claims for copyright infringement and
misappropriation of trade secrets, based on additional evidence found in the
discovery process. On April 1, 1998, Symantec amended its complaint to add
claims for misappropriation of trade secrets, RICO (Racketeer Influenced and
Corrupt Organizations Act) and related claims based on additional evidence
uncovered in the litigation. Following motions by Network Associates, the court
dismissed Symantec's unfair competition and trade secret claims regarding the
copyrighted code and its RICO and interference claims. On October 22, 1998, the
court consolidated this case with the case against Network Associates and the
case brought by CyberMedia, both of which are described below.
On September 4, 1998, Symantec filed a new lawsuit against Network Associates in
the United States District Court, Northern District of California, for copyright
infringement, trade secret misappropriation and unfair competition. Symantec
continues to investigate the extent to which Network Associates may have
misappropriated Symantec's intellectual property and plans to aggressively
pursue its remedies under this lawsuit, which include both injunctive relief and
monetary damages.
On September 15, 1997, Hilgraeve Corporation (Hilgraeve) filed a lawsuit in the
United States District Court, Eastern District of Michigan, against Symantec,
alleging that unspecified Symantec products infringe a patent owned by
Hilgraeve. The lawsuit requests damages, injunctive relief and costs and
attorney fees. Symantec
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
believes this claim has no merit and intends to defend the action vigorously.
On February 4, 1998, CyberMedia, Inc. (CyberMedia), which in September 1998 was
acquired by Network Associates, filed a lawsuit in the United States District
Court, Northern District of California, against Symantec, ZebraSoft Inc. and
others, alleging that Symantec's Norton Uninstall Deluxe infringes CyberMedia's
copyright and asserting related state law claims. The suit requests damages,
injunctive relief, costs and attorneys fees. In May 1998, CyberMedia filed a
motion seeking a preliminary injunction prohibiting sale or development of the
challenged code, which preliminary injunction was granted with respect to
Symantec's domestic activities in September 1998. Subsequently, Symantec ceased
selling the Norton Uninstall Deluxe product. Symantec intends to defend the
action vigorously.
On February 19, 1998, a class action complaint was filed by the 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 originally purported to assert claims for
breach of implied warranty, fraud, unfair business practices and violation of
California's Consumer Legal Remedies Act, among others, arising from the alleged
inability of earlier versions of Norton AntiVirus to function properly after the
year 2000; all but the unfair business practice claims have been dismissed
following Symantec's demurrer. The complaint seeks unspecified damages and
injunctive relief. Symantec believes that these actions have no merit and
intends to defend itself vigorously.
In July 1998, the Ontario Court of Justice (General Division) ruled that
Symantec should pay a total of approximately $6.8 million for damages and legal
costs to Triolet Systems, Inc. and Brian Duncombe in a decade-old copyright
action, for damages arising from the grant of a preliminary injunction against
the defendant. The damages were awarded following the court's ruling that
evidence presented later in the case showed the injunction was not warranted.
Symantec inherited the case through its 1995 acquisition of Delrina Corporation,
which was the plaintiff in this lawsuit. Symantec has appealed the decision.
Symantec recorded a charge of $5.8 million in June 1998, representing the
unaccrued portion of the judgment plus costs. As of June 30, 1999, the Company
believes that it has adequately accrued for both the settlement and all legal
costs.
In March 1997, a class action complaint was filed against Quarterdeck in San
Diego County Superior Court. The case was later transferred to and is currently
pending in Los Angeles County Superior Court. The complaint, purportedly on
behalf of a class of purchasers of Quarterdeck's MagnaRAM2 product, seeks
damages and injunctive relief under the Consumers Legal Remedies Act and
Business and Professions Code sections beginning with 17200 and 17500. Symantec
believes these claims to be without merit and intends to defend itself
vigorously.
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.
On July 30, 1998, a class action complaint was filed against Quarterdeck in the
Supreme Court of the State of New York, County of New York, on behalf of a
purported class of purchasers of Procomm Plus version 4.0 for Windows product
(Product). The complaint purported to assert claims for breach of warranty and
violation of New York's Consumer Protection From Deceptive Acts and Practices
Act arising from the Product's inability to process dates containing the year
2000. The complaint was dismissed and the court entered judgment in
Quarterdeck's favor in April 1999. The plaintiff has appealed the Court's
decision.
Over the past few years, it has become common for software companies, including
Symantec, to receive claims of
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
patent infringement. Symantec is currently evaluating claims of patent
infringement asserted by several parties, with respect to certain of the
Company's products. While the Company believes that it has valid defenses to
these claims, the outcome of any related litigation or negotiation could have a
material adverse impact on the Company's future results of operations or cash
flows.
Symantec is involved in a number of other judicial and administrative
proceedings incidental to its business. The Company intends to defend all of the
aforementioned pending lawsuits vigorously, and although adverse decisions (or
settlements) may occur in one or more of the cases, the final resolution of
these lawsuits, individually or in the aggregate, is not expected to have a
material adverse affect on the financial condition of the Company, although it
is not possible to estimate the possible loss or losses from each of these
cases. Depending, however, on the amount and timing of an unfavorable resolution
of these lawsuits, it is possible that the Company's future results of
operations or cash flows could be materially adversely affected in a particular
period. The Company has accrued certain estimated legal fees and expenses
related to certain of these matters; however, actual amounts may differ
materially from those estimated amounts.
NOTE 7. STOCK REPURCHASE
On March 22, 1999, the Board of Directors (the "Board") of Symantec authorized
the repurchase of up to $75 million of Symantec's outstanding common stock. As
of June 30, 1999, the Company has repurchased 1,000,000 shares at prices ranging
from $17.90 to $19.90, for an aggregate amount of $18.7 million.
NOTE 8. ACQUISITIONS
Effective May 18, 1998, the Company entered into a Master Agreement with IBM to
acquire rights to IBM's digital immune technology. In addition, the Company
assumed the majority of IBM's license arrangements with customers of IBM
anti-virus products. In return for the various rights acquired from IBM, the
Company agreed to pay $16 million in installments over a specified period as
well as pay royalties on revenues received from the distribution of
immune-enabled Symantec products and immune services provided by the Company
using the digital immune technology. The royalties are subject to specified
maximums and vary by time periods with ultimate termination of royalties as of a
specified date. In addition, the Company entered into a patent cross-licensing
agreement under which the parties licensed to each other their respective patent
portfolios. The transaction was accounted for as a purchase. As of June 30,
1999, Symantec paid IBM $8 million in cash with the remaining $8 million payable
in two equal installments in August 1999 and November 1999. In addition, the
Company assumed liabilities of $3 million and incurred additional expenses of
approximately $1 million as part of the transaction. Under the transaction, the
Company recorded approximately $7 million for in-process research and
development, $12 million for goodwill and $1 million for certain prepaid
research and development and other assets. A valuation specialist used
management's estimates to establish the amount of in-process research and
development. The assumptions and projections used for this valuation have not
changed during the June 1999 quarter. Goodwill will be amortized over 5 years.
For the quarters ended June 30, 1999 and 1998, the Company incurred
approximately $0.6 million and $0.2 million, respectively, of amortization
expense related to these assets.
On June 24, 1998, Symantec entered into an agreement whereby Symantec purchased
the operations of Binary, an Auckland, New Zealand based company, for $27.8
million plus $0.7 million of acquisition related costs. The transaction was
accounted for as a purchase. Under the transaction, Symantec originally recorded
approximately $7.1 million for acquired in-process research and development
$16.9 million for capitalized software technology, with the remaining $3.8
million of the purchase price allocated to goodwill, net tangible and intangible
assets. During the June 1999 quarter, the Company reduced its purchase price
allocated to goodwill by $2.3 million. All other assumptions and projections
made have not changed during the June 1999 quarter. The capitalized software,
goodwill and intangibles are being amortized over a 4-year period. For the
quarters ended June 30, 1999 and 1998,
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
the Company incurred approximately $1.1 million and $0.3 million, respectively,
of amortization expense related to these assets.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, which defers the adoption of SFAS No. 133 for one
year. SFAS 133 will be effective for Symantec at the beginning of the June 2001
quarter for both annual and interim reporting periods. Symantec is evaluating
the potential impact of this accounting pronouncement on its required
disclosures and accounting practices.
NOTE 10. SEGMENT INFORMATION
Symantec markets its products in North America and international countries
primarily through retail and distribution channels. Symantec's reportable
segments are significant strategic business units that offer different products
and services, distinguished by customer needs. The Company has four reportable
segments: Remote Productivity Solutions, Security and Assistance, Internet Tools
and Corporate Sunset. There are no intersegment sales. Symantec's Chief
Executive Officer and his staff evaluate performance based on profit or loss
from operations before income taxes, not including nonrecurring gains and
losses, foreign exchange gains and losses and miscellaneous other income and
expenses. Non-segment items include all general and administrative expenses and
charges that are one-time in nature, such as acquired in-process research and
development, judgment settlements and restructuring and other expenses, and are
not allocated to the business units. Assets and liabilities are not discretely
reviewed by segment and have not significantly changed since the Company's
previously filed Form 10-K for the year ended March 31, 1999.
On June 10, 1999, the Company announced that it intends to establish the
Internet Tools Business Unit as a separate company. The transition is in early
stages and details will be determined over the next three to nine months.
The following table summarizes each segment's net revenues from external
customers and operating income (loss):
Remote Security Non-
Productivity and Internet Corporate Total Segment Total
(In Thousands) Solutions Assistance Tools Sunset Segments Items Company
--------------------------------------------------------------------------------------------------
For the three months
ended June 30, 1999:
Net revenues from
external customers $ 56,181 $ 114,965 $ 3,755 $ 237 $ 175,138 $ -- $ 175,138
Operating income (loss) 14,562 37,175 (3,797) (2,585) 45,355 (17,609) 27,746
For the three months
Ended June 30, 1998:
Net revenues from
external customers 55,475 71,382 10,691 222 137,770 -- 137,770
Operating income (loss) 16,295 10,598 1,780 (4,394) 24,279 (30,994) (6,715)
12
13
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
GEOGRAPHICAL INFORMATION
Three months ended June 30,
---------------------------
(In thousands) 1999 1998
-------- --------
Net revenues from external customers:
United States $ 99,769 $ 86,162
Other foreign countries 75,369 51,608
-------- --------
$175,138 $137,770
======== ========
NOTE 11. SUBSEQUENT EVENT
On July 20, 1999, the Company acquired URLabs, based in Hampton, Va., a
technology leader in the development of Internet access control and email
scanning solutions. The acquisition will be accounted for as a purchase. In
July, the Company paid $41.5 million for 100% of the outstanding stock of
URLabs. It is likely that the Company will pay additional amounts associated
with this acquisition.
13
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS RISK FACTORS
The following discussion contains forward-looking statements that involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others things, those risk factors set forth in this
section and elsewhere in this report. We identify forward-looking statements by
words such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or similar terms that refer to the future. We cannot guarantee future results,
levels of activity, performance or achievements.
OUR EARNINGS AND STOCK PRICE ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. Due to the
factors noted below, our earnings and stock price have been and may continue to
be subject to significant volatility, particularly on a quarterly basis. We have
previously experienced shortfalls in revenue and earnings from levels expected
by securities analysts and investors, which have had an immediate and
significant adverse effect on the trading price of our common stock. This may
occur again in the future.
OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND WE WILL NEED TO
ADAPT OUR DEVELOPMENT TO THESE CHANGES. We participate in a highly dynamic
industry characterized by rapid change and uncertainty relating to new and
emerging technologies and markets. The recent trend toward server-based
applications in networks and applications distributed over the Internet could
have a material adverse affect on sales of our products. Future technology or
market changes may cause certain of our products to become obsolete more quickly
than expected.
THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE AND WE EXPECT THAT
COMPETITION WILL CONTINUE AND MAY INCREASE. It is influenced by the strategic
direction of major microcomputer hardware manufacturers and operating system
providers. Our competitiveness depends on our ability to enhance existing
products and to offer successful new products on a timely basis. We have limited
resources and must restrict product development efforts to a relatively small
number of projects.
INTRODUCTION OF NEW OPERATING SYSTEMS MAY CAUSE SIGNIFICANT FLUCTUATIONS IN OUR
FINANCIAL RESULTS AND STOCK price. If we are unable to successfully and timely
develop products that operate under existing or new operating systems, or if
pending or actual releases of the new operating systems delay the purchase of
our products, our future net revenues and operating results could be materially
adversely affected.
Inclusions of features which directly compete with our products by Microsoft in
new versions of Windows, such as Windows 2000 and Windows 98 Second Edition, may
decrease the demand for certain of our products, including those currently under
development and products specifically intended for Windows 2000.
Our financial results and our stock price declined significantly within
approximately 6 months after the releases of Windows 3.1, Windows 95 and Windows
98, which in some cases also caused the additional requirement for hardware
upgrades, resulting in shifts in customer spending from software to hardware. We
could face adverse financial results and additional stock price declines
following future releases of operating systems.
Additionally, as hardware vendors incorporate additional server-based network
management and security tools into network operating systems, the demand may
decrease for some of our products, including those currently under development.
THE TREND TOWARD CONSOLIDATION IN OUR INDUSTRY MAY IMPEDE OUR ABILITY TO COMPETE
EFFECTIVELY. As consolidation in the software industry continues fewer companies
dominate particular markets, changing the nature of the market and potentially
providing consumers with fewer choices. Also, some of these companies offer a
broader range of products than us, ranging from desktop to enterprise solutions.
We may not be able to compete effectively against these competitors.
Furthermore, we use strategic acquisitions, as necessary, to acquire technology,
people and products for our overall product strategy. We have completed a number
of acquisitions and
14
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
dispositions of technologies, companies and products and may acquire and dispose
of other technologies, companies and products in the future. The trend toward
consolidation in our industry may result in increased competition in acquiring
these technologies, people or products, resulting in increased acquisition costs
or the inability to acquire the desired technologies, people or products. Any of
these changes may have a significant adverse effect on our future revenues and
operating results.
WE MUST EFFECTIVELY ADAPT TO CHANGES IN THE DYNAMIC TECHNOLOGICAL ENVIRONMENT OF
THE INTERNET IN A TIMELY MANNER. Critical issues concerning the commercial use
of the Internet, including security, reliability, cost, ease of use,
accessibility, quality of service or potential tax or other government
regulation, remain unresolved and may affect the use of the Internet as a medium
to distribute or support our software products and the functionality of some of
our products. If we are unsuccessful in timely assimilating changes in the
Internet environment into our business operations and product development
efforts, our future net revenues and operating results could be adversely
affected.
WE FACE INTENSE PRICE-BASED COMPETITION FOR SALES OF OUR PRODUCTS. Price
competition is often intense in the microcomputer software market, especially
for utility and anti-virus products. Many of our competitors have significantly
reduced the price of utility and anti-virus products. Price competition may
continue to increase and become even more significant in the future, resulting
in reduced profit margins.
THE TRANSITION TO INTEGRATED SUITES OF UTILITIES MAY RESULT IN REDUCED REVENUES.
Symantec and our competitors now provide integrated suites of utility products.
The price of integrated utility suites is significantly less than the aggregate
price of stand-alone products that are included in these utility suites when
sold separately. As a result of the shift to integrated utility suites, price
competition is intense and we have experienced cannibalization of our
stand-alone products that are included within the suite. As a result, there may
be a negative impact on our revenues 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, our products may not compete effectively with
competitors' products or integrated utility suites introduced in the future.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. While
our diverse product line has tended to lessen fluctuations in quarterly net
revenues, these fluctuations have occurred and may occur in the future.
Fluctuations may be caused by a number of factors, including:
- the timing of announcements and releases of new or enhanced versions
of our products and product upgrades;
- the introduction of competitive products by existing or new
competitors;
- reduced demand for any given product;
- seasonality in the end-of-period buying patterns of foreign and
domestic software markets; and
- the market's transition between operating systems.
A significant proportion of our revenues are generated during the last month of
the quarter. Most resellers tend to make a majority of their purchases at the
end of the fiscal quarter. In addition, many corporate customers negotiate site
licenses near the end of each quarter. In part, this is because these two groups
are able, or believe that they are able, to negotiate lower prices and more
favorable terms. Our reliance on a large proportion of revenue occurring at the
end of the quarter and the increase in the dollar value of transactions that
occur at the end of the quarter can result in increased uncertainty relating to
quarterly revenues. Due to this end-of-period buying pattern, forecasts may not
be achieved, either because expected sales do not occur or because they occur at
lower prices or on terms that are less favorable to us. In addition, these
factors increase the chances that our results could diverge from the
expectations of investors and analysts.
WE ARE DEPENDENT UPON THE RETAIL DISTRIBUTION CHANNEL. A large portion of our
sales are made through the retail distribution channel, which is subject to
events that create unpredictable fluctuations in consumer demand. Our retail
distribution customers also carry our competitors' products. These retail
distributors may have limited capital
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
to invest in inventory. Their decisions to purchase our products are partly a
function of pricing, terms and special promotions offered by us and our
competitors, over which we have no control and which we cannot predict.
Our agreements with distributors are generally nonexclusive and may be
terminated by the distributors or by us without cause. Some distributors and
resellers have experienced financial difficulties in the past. Distributors that
account for a significant portion of our sales may experience financial
difficulties in the future. When our distributors have experienced financial
difficulties in the past, we have successfully moved these inventories to other
distributors. However, we may not be able to do so in the future. If these
distributors do experience financial difficulties and we are unable to move
their inventories to other distributors, we may experience reduced sales or
increased write-offs, which would adversely affect our operating results.
WE MAY BE UNSUCCESSFUL IN UTILIZING NEW DISTRIBUTION CHANNELS. We currently
offer a broad range of products and services over the Internet. We may not be
able to effectively adapt our existing, or adopt new, methods of distributing
our software products utilizing the rapidly evolving Internet and related
technologies. The adoption of new channels may adversely impact existing
channels and/or product pricing, which may reduce our future revenues and
profitability.
CHANNEL FILL MAY AFFECT OUR NET REVENUES. Our pattern of net revenues and
earnings may be affected by "channel fill." Distributors may fill their
distribution channels in anticipation of price increases, sales promotions or
incentives. Distributors, dealers and end users often delay purchases, cancel
orders or return products in anticipation of the availability of the new version
or new product. As a result, distributor inventories may decrease between the
date we announce a new version or new product and the date of release. Channels
may also become filled simply because the distributors do not sell their
inventories to retail distribution or retailers to end users as anticipated. If
sales to retailers or end-users do not occur at a sufficient rate, distributors
will delay purchases or cancel orders in later periods or return prior purchases
in order to reduce their inventories.
PRODUCT RETURNS MAY AFFECT OUR NET REVENUES. Product returns can occur when we
introduce upgrades and new versions of products or when distributors or
retailers have excess inventories. Our return policy allows distributors,
subject to various limitations, to return purchased products in exchange for new
products or for credit towards future purchases. End users may return our
products through dealers and distributors within a reasonable period from the
date of purchase for a full refund. In addition, retailers may return older
versions of our products. We estimate and maintain reserves for product returns.
However, future returns could exceed the reserves we have established, which
could have a material adverse affect on our operating results.
OUR INCREASED SALES OF SITE LICENSES MAY INCREASE FLUCTUATIONS IN OUR FINANCIAL
RESULTS AND COULD AFFECT OUR BUSINESS. We sell corporate site licenses through
the distribution channel and through corporate resellers. We are increasingly
emphasizing sales to corporations and small businesses through volume licensing
agreements. These licensing arrangements tend to involve a longer sales cycle
than sales through other distribution channels, require greater investment of
resources in establishing the enterprise relationship and can sometimes result
in lower operating margins. The timing of the execution of volume licenses, or
their nonrenewal or renegotiation by large customers, could cause our results of
operations to vary significantly from quarter to quarter and could have a
material adverse impact on our results of operations. In addition, if the
corporate marketplace grows and becomes a larger component of the overall
marketplace, we may not be successful in expanding our corporate segment to take
advantage of this growth.
WE DEPEND ON DISTRIBUTION BY VALUE ADDED RESELLERS AND INDEPENDENT SOFTWARE
VENDORS FOR A SIGNIFICANT PORTION OF OUR REVENUES. We distribute some of our
products through value added resellers and independent software vendors under
arrangements through which our products are included with these resellers' and
vendors' hardware and software products prior to sale by them through retail
channels. If we are unsuccessful in maintaining our current relationships and
securing license agreements with additional value added resellers and
independent software vendors,
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
or if these resellers and vendors are unsuccessful in selling their products,
our future net revenues and operating results may be adversely affected.
WE MAY EXPERIENCE DIFFICULTY INTEGRATING ACQUISITIONS. We have completed a
number of acquisitions including four acquisitions in fiscal 1999 and may
acquire other companies and technology in the future. We may encounter
difficulties in integrating the operations and employees of and realizing
certain economies of scale from, past and future acquisitions. In addition, we
may need to secure financing to pay for future acquisitions. Acquisition
financing may not be available on favorable terms or at all. We typically incur
significant expenses in connection with our acquisitions. Future acquisitions
may have a significant adverse impact on our future profitability and financial
resources.
WE FACE RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS. We transact a significant
portion of our revenues, manufacturing costs and operating expenses outside of
the United States, often in foreign currencies. As a result, our operating
results may be materially and adversely affected by fluctuations in currency
exchange rates and general uncertainty with each country's political and
economic structure.
INCREASED UTILIZATION AND COSTS OF OUR TECHNICAL SUPPORT SERVICES MAY ADVERSELY
AFFECT OUR FINANCIAL RESULTS. Technical support costs comprise a significant
portion of our operating costs and expenses, as with many companies in the
software industry. Over the short term, we may be unable to respond to
fluctuations in customer demand for support services. We also may be unable to
modify the format of our support services to compete with changes in support
services provided by competitors.
THE RESULTS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE UNCERTAIN. We believe
that we will need to make significant research and development expenditures to
remain competitive. While we perform extensive usability and beta testing of new
products, the products we are currently developing or may develop in the future
may not be technologically successful. If they are not technologically
successful, our resulting products may not achieve market acceptance and our
products may not compete effectively with products of our competitors currently
in the market or introduced in the future.
THE LENGTH OF THE PRODUCT DEVELOPMENT CYCLE IS DIFFICULT TO PREDICT. The length
of our product development cycle has generally been greater than we originally
expected. We are likely to experience delays in future product development.
These delays could have a material adverse affect on the amount and timing of
future revenues.
WE MUST MANAGE AND RESTRUCTURE OUR EXPANDING OPERATIONS EFFECTIVELY. We
continually evaluate our product and corporate strategy. We have in the past
undertaken and will in the future undertake organizational changes and/or
product and marketing strategy modifications.
These organizational changes increase the risk that objectives will not be met
due to the allocation of valuable limited resources to implement changes.
Further, due to the uncertain nature of any of these undertakings, these efforts
may not be successful and we may not realize any benefit from these efforts.
WE MUST ATTRACT AND RETAIN PERSONNEL WHILE COMPETITION FOR PERSONNEL IN OUR
INDUSTRY IS INTENSE. We believe that our future success will depend in part on
our ability to recruit and retain highly skilled management, marketing and
technical personnel. Competition in recruiting personnel in the software
industry is intense. To accomplish this, we believe that we must provide
personnel with a competitive compensation package, including stock options,
which requires ongoing stockholder approval.
WE DEPEND ON OUR INTERNAL COMMUNICATIONS SYSTEMS THAT MAY BE DISRUPTED. Our
order entry and product shipping centers are geographically dispersed. If our
communications between these centers are disrupted, particularly at the end of a
fiscal quarter, we will suffer an unexpected shortfall in net revenues and a
resulting adverse impact on our operating results. If communications and
Internet connectivity are disrupted, disruptions in communications and Internet
connectivity may also cause delays in customer access to our Internet-based
services or product sales. A business disruption could occur as a result of
natural disasters or the interruption in service by
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
communications carriers and may cause delays in product development that could
adversely impact our future net revenues.
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. We regard our software
as proprietary and underlying technology as proprietary. We seek to protect our
proprietary rights through a combination of confidentiality agreements and
copyright, patent, trademark and trade secret laws. However, we do not employ
technology to prevent copying of our products. Third parties may copy aspects of
our products or otherwise obtain and use our proprietary information without
authorization or develop similar technology independently. All of our products
are protected by copyright and we have a number of patents and patent
applications pending. We may not achieve the desired protection from, and third
parties may design around, our patents. In addition, existing copyright laws
afford limited practical protection. Furthermore, the laws of some foreign
countries do not offer the same level of protection of our proprietary rights as
the laws of the United States. Any legal action that we may bring to protect
proprietary information could be expensive and may distract management from
day-to-day operations.
WE ARE INVOLVED IN LITIGATION WHICH COULD, AND ANY FUTURE LITIGATION MAY, AFFECT
OUR FINANCIAL RESULTS. From time to time, we may be subject to claims that we
have infringed the intellectual property rights of others, that our products are
not Year 2000 compliant or other product liability claims, or other claims
incidental to our business. We are involved in a number of judicial and
administrative proceedings incidental to our business. For a discussion of our
current litigation, see Note 6 of Notes to Condensed Consolidated Financial
Statements in this Form 10-Q. We intend to defend and/or pursue all of these
lawsuits vigorously. We may suffer an unfavorable outcome in one or more of the
cases. We do not expect the final resolution of these lawsuits to have a
material adverse effect on our financial position, individually or in the
aggregate. However, depending on the amount and timing of unfavorable
resolutions of these lawsuits, our future results of operations or cash flows
could be materially adversely affected in a particular period.
Year 2000 - Product Liability Litigation
We believe the software products that we currently develop and actively market
are Year 2000 compliant for significantly all functionality. However, these
products could contain errors or defects related to the Year 2000. In addition,
earlier versions of our products, those that are not the most currently released
or are not currently being developed, may not be Year 2000 compliant. We have
sold some of our older products, which are not being actively developed and
updated. These older products are also not necessarily Year 2000 compliant and
are no longer sold by us.
Software Defects and Product Liability
Software products frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. For example, in
the past, our anti-virus software products have incorrectly detected viruses
that do not exist. We have not experienced any material adverse effects
resulting from any of these defects or errors to date and we test our products
prior to release. Nonetheless, defects and errors could be found in current
versions of our products, future upgrades to current products or newly developed
and released products. Software defects could result in delays in market
acceptance or unexpected reprogramming costs, which could materially adversely
affect our operating results. Most of our license agreements with customers
contain provisions designed to limit our exposure to potential product liability
claims. It is possible, however, that these provisions limiting our liability
may not be valid as a result of federal, state, local or foreign laws or
ordinances or unfavorable judicial decisions. A successful product liability
claim could have a material adverse affect on Symantec's business, operating
results and financial condition.
THE CONVERSION OF THE EUROPEAN CURRENCIES TO THE EURO MAY IMPACT OUR FOREIGN
EXCHANGE HEDGING PROGRAM. On January 1, 1999, the euro became the common
currency of 11 of the 15 member countries of the European Union. The national
currencies of these 11 countries will coexist with the euro at fixed exchange
rates through December 31, 2001. Euro denominated bills and coins will be
introduced on January 1, 2002 and, by July 1, 2002, the national currencies will
no longer be legal tender. We expect that the euro will dictate changes in our
foreign
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
exchange hedging program. These changes may lead to increased fluctuations in
foreign currency hedging results. Based on current information, we do not
believe that the euro will have a material adverse impact on our operations or
financial condition.
OUR SOFTWARE PRODUCTS AND WEB SITE MAY BE SUBJECT TO INTENTIONAL DISRUPTION.
While we have not been the target of software viruses specifically designed to
impede the performance of our products, such viruses could be created and
deployed against our products in the future. Similarly, experienced computer
programmers, or hackers, may attempt to penetrate our network security or the
security of our web site from time to time. A hacker who penetrates our network
or web site could misappropriate proprietary information or cause interruptions
of our services. We might be required to expend significant capital and
resources to protect against, or to alleviate, problems caused by virus creators
and hackers.
WE MAY EXPERIENCE REDUCED DEMAND FOR OUR PRODUCTS DUE TO CHANGES IN CUSTOMER
BEHAVIOR RESULTING FROM YEAR 2000 PREPARATION. With the emerging requirements on
Year 2000 compliance and functionality, many enterprise customers may use their
Information Technology budgets in 1999 to focus on Year 2000 issues. In
addition, our customer's Information Technology organizations may be unwilling
to deploy new software until after the Year 2000 in order to reduce the
complexity of any changes in their systems required by any actual Year 2000
failures. Either of these factors could reduce sales of our products and could
have an adverse affect on revenues. In addition, we may experience significantly
reduced revenues from our Norton 2000 product sales as demand may significantly
decline and could adversely affect our future operating results.
WE MAY EXPERIENCE DISRUPTION OF OUR INTERNAL SYSTEMS AS A RESULT OF THE YEAR
2000. We have completed a major evaluation of our internal applications, systems
and databases. We are modifying or replacing portions of our hardware and
associated software to enable our operational systems and networks to function
properly with respect to dates leading up to January 1, 2000, and thereafter. We
continue to evaluate interfaces between our systems and third-party systems,
such as those of key suppliers, distributors and financial institutions, for
Year 2000 functionality. In addition, the systems of other companies with which
we do business may not address Year 2000 problems on a timely basis. We expect
the process of evaluating third-party Year 2000 compliance to be an ongoing
process. We are evaluating Year 2000 exposures of our key suppliers, as well as
our buildings and related facilities. We expect that the costs to complete the
Year 2000 project to be approximately $2 million and will be expensed as
incurred.
Our Year 2000 Project is divided into several phases:
Assessment - where the vulnerability of the hardware, software, process or
service element is identified
Planning - where corrective action is determined for each vulnerable
element
Remediation and Unit Test - where the corrective action is taken and
initial testing is performed
Limited System Test - where related elements are tested together, using
dates in the vulnerable range and any necessary follow-up remediation is
completed
We track the progress of the Year 2000 on a sub-project level. The following
table is a summary of the completion status and currently expected completion
dates of each phase for each sub-project. The expected completion dates are
subject to the risks and uncertainties of locating and correcting errors in
complex computer systems. The actual dates on which we complete each phase may
vary significantly. Our principal software vendor will be providing delayed Year
2000 patches throughout 1999. These patches need to be tested before installing
them into our environment. In order to optimize the usage of our special test
environment and people resources, we have conservatively extended our Limited
Systems Test phase. Again, we realized that some of our primary hardware vendors
would continue to supply delayed Year 2000 fixes through 1999 and therefore we
will need to prepare accordingly. Building and related facilities dates were
modified to address the resources involved in the physical move of our World
Headquarters in the latter half of 1999. We believe that these conservative date
modifications
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
will not impair our ability to remain in business before, throughout and beyond
the transition into the new millennium. Periodic updates regarding the Year 2000
status are provided to both the Executive Staff and Board of Directors.
SUB-PROJECT PHASE AND STATUS OR DUE DATE
- -------------------------------------------------------------------------------------------------
Limited
Assessment Planning Remediation System Test
---------------------------------------------------------
Business Systems Complete Complete Complete Jul-Dec 1999
Networks, Servers & Communications
Americas Complete Complete Complete Jul-Dec 1999
EMEA Complete Complete Sep 1999 Oct-Dec 1999
Japan & Asia/Pacific Complete Complete Sep 1999 Oct-Dec 1999
Desktop and Mobile Computers Complete Complete Sep 1999 Jul-Dec 1999
Buildings and Related Facilities Complete Sep 1999 Dec 1999 Jul-Dec 1999
Suppliers and Outside Services Complete Aug 1999 Oct 1999 Oct-Dec 1999
If our electric power or telephone services are interrupted for significant
periods, some of our facilities might be unable to operate. We maintain business
recovery plans for our major locations to provide for an orderly response to
various disaster scenarios. We are reviewing and augmenting these plans to
provide contingency plans for potential internal and external Year 2000 related
problems. We have scheduled completion of the analysis and the associated
contingency plans for September 1999.
We believe that, following our conversion to new software and modifications of
existing computer hardware and software, we will not suffer significant
operational problems with our computer systems due to the Year 2000. However, if
we are unable to complete remaining modifications and conversions in a timely
manner, Year 2000 noncompliance might materially adversely impact our
operations. Because testing of the Year 2000 functionality of our systems must
occur in a simulated environment, we are unable to test fully all Year 2000
interfaces and capabilities prior to the Year 2000.
We have not deferred any other information systems projects as a result of our
focus on Year 2000 compliance issues. We believe that our exposure from Year
2000 issues is not material to our business as a whole. However, if certain key
suppliers or distributors should suffer business interruptions due to Year 2000
problems, we could be forced to delay product shipments.
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21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
OVERVIEW
Symantec is a world leader in utility software for business and personal
computing. Our products and solutions make users productive and keep their
computers safe and reliable, anywhere and anytime. Founded in 1982, we have
offices in 26 countries around the world. Symantec has a 52/53-week fiscal
accounting year. The June 30, 1999 and 1998 quarters closed on July 2, 1999 and
July 3, 1998, respectively and each comprised 13 weeks of revenue and expense
activity.
RESULTS OF OPERATIONS
During the June 1998 quarter, we acquired International Business Machine's (IBM)
anti-virus business and Binary Research Limited's (Binary) operations (See Note
8 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q.)
The results of operations from the acquired IBM assets and of Binary have been
included in our results of operations from their respective dates of
acquisitions.
The following table sets forth each item from our consolidated statements of
income as a percentage of net revenues and the percentage change in the total
amount of each item for the periods indicated:
Three Months Percent
Ended Change
June 30, in Dollar
1999 1998 Amounts
---- ---- ---------
(Unaudited)
Net revenues 100% 100% 27%
Cost of revenues 17 15 51
---- ---
Gross margin 83 85 23
Operating expenses:
Research and development 16 18 10
Sales and marketing 42 51 5
General and administrative 5 7 (4)
Amortization of goodwill and other
Intangibles 2 -- *
Restructuring and other expenses 2 -- *
Acquired in-process research and
development -- 10 (100)
Litigation judgment -- 4 (100)
---- ---
Total operating expenses 67 90 (6)
---- ---
Operating income (loss) 16 (5) *
Interest income 2 4 (50)
Interest expense -- -- *
Income, net of expense, from sale of
technologies and product lines 3 11 (68)
Other income (expense), net -- 2 (77)
---- ---
Income before income taxes 21 12 131
Provision for income taxes 7 6 51
---- ---
Net income (loss) 14% 6% 212
==== ===
* percentage change is not meaningful.
21
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
NET REVENUES
Net revenues increased 27% from approximately $138 million in the June 1998
quarter to $175 million in the June 1999 quarter. Revenue growth in the June
1999 quarter compared to the June 1998 quarter was attributable to our Security
and Assistance and Remote Productivity Solutions business units, partially
offset by a decline in our Internet Tools business unit's revenues. The increase
in the Security and Assistance and Remote Productivity Solutions business unit
revenue was due to strong retail and corporate growth. The lower Internet Tools
business unit revenue is due primarily to one large contract in June 1998.
BUSINESS UNITS
The Security and Assistance business unit is dedicated to being indispensable to
customers' daily use of computers by increasing productivity and keeping
computers safe and reliable. The Security and Assistance business unit comprised
approximately 66% and 52% of net revenues in the quarters ended June 30, 1999
and 1998, respectively. Increased net revenues for the business unit in the
quarter ended June 30, 1999, compared to the quarter ended June 30, 1998, was
primarily related to outbreaks of significant viruses, resulting in an increase
in Norton AntiVirus and Norton SystemWorks sales. In addition, the Ghost product
(disk-cloning technology), acquired as part of the Binary agreement in fiscal
1999, and Norton 2000 have shown significant growth.
The Remote Productivity Solutions business unit helps remote professionals
remain productive and work reliably, anywhere and anytime. The Remote
Productivity Solutions business unit comprised approximately 32% and 40% of net
revenues for the quarters ended June 30, 1999 and 1998, respectively. Although
revenues decreased as a percentage of total revenues, absolute dollar revenue
for this business unit increased slightly from strong sales of pcANYWHERE.
Internet Tools, which primarily are products providing an easy to use Java
development environment, comprised approximately 2% and 8% of net revenues in
the quarters ended June 30, 1999 and 1998, respectively. The business unit's net
revenues are lower in the quarter ended June 30, 1999 over the quarter ended
June 30, 1998, primarily due to a $6 million license contract with a single
customer, which occurred in the June 1998 quarter.
INTERNATIONAL
Net revenues from international sales outside of North America were $68 million
and $47 million and represented 39% and 35% of total net revenues in the
quarters ended June 30, 1999 and 1998, respectively. The increase in net
revenues was the result of sales growth in Europe, Middle East and Africa
(EMEA), Japan and the Asia-Pacific regions.
Foreign exchange rate fluctuations during the quarter ended June 30, 1999
compared to the quarter ended June 30, 1998 did not materially affect quarterly
revenue.
GROSS MARGIN
Gross margin represents net revenues less cost of revenues. Cost of revenues
consists primarily of manufacturing expenses, costs for producing manuals,
packaging costs, royalties paid to third parties under publishing contracts and
amortization and write-off of capitalized software and purchased product rights
and technologies.
Gross margins decreased to 83% of net revenues in the June 1999 quarter from 85%
in the June 1998 quarter. Factors contributing to the decrease in gross margin
percentage includes a change in product mix and increased price competition.
Gross margin was also adversely impacted by increased royalty expense from
products sold with higher royalty rates than those sold in June 1998. In
addition, technical support costs related to corporate sales increased as the
mix of corporate sales increased. These increases in cost of sales were
partially offset by decreases in obsolescence expense.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
During the June 1998 quarter, we capitalized approximately $17 million of
software technology acquired as part of our acquisition of certain assets of
Binary. Amortization of capitalized software, including amortization and
write-off of both purchased product rights and capitalized software development
expenses, totaled $2.3 million and $0.7 million for the June 1999 and 1998
quarters, respectively. Prior to consideration of any fiscal 2000 acquisitions,
we expect to expense approximately $2 million of capitalized software
amortization per quarter, over the next 12 quarters to cost of revenues.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 10% to $28 million in the June 1999
quarter from $25 million in the June 1998 quarter primarily due to growth in
salaries and third-party consulting fees related to localization and integration
of new product releases.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased 5% from $70 million in the June 1998
quarter to $74 million in the June 1999 quarter. The increase in sales and
marketing expenses primarily relates to growth in salaries, wages and
commissions.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses remained relatively flat and totaled
approximately $9 million in both the June 1999 and 1998 quarters.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased approximately $3.8
million from $0.3 million in June 1998 to $4.1 million in the June 1999 quarter.
The increase is due to capitalization of additional goodwill and other
intangibles from the acquisitions we made during fiscal 1999. Prior to
consideration of any fiscal 2000 acquisitions, we expect continued amortization
of goodwill and other intangibles related to these acquisitions of approximately
$4 million over the following 16 quarters. (See Note 8 of Notes to Condensed
Consolidated Financial Statements in this Form 10-Q.)
RESTRUCTURING AND OTHER EXPENSES
Restructuring and other expenses amounted to approximately $2.8 million for the
quarter ended June 1999. Approximately $2.4 million of these charges is related
to the departure of our former CEO.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES
During the quarter ended June 1999, we incurred no acquired in-process research
and development costs. Acquired in-process research and development expenses
were approximately $14 million in the June 1998 quarter. In the June 1998
quarter, we recognized acquired in-process research and development expenses of
$7.1 million in connection with the acquisitions of certain assets and
technologies of IBM, and a similar amount in connection with the acquisition of
the assets and technologies of Binary (See Note 8 of Notes to Condensed
Consolidated Financial Statements in this Form 10-Q.) The assumptions and
projections made in relation to the fiscal 1999 acquisitions have not changed.
LITIGATION JUDGMENT
Litigation judgment expenses totaled approximately $6 million in the June 1998
quarter. These expenses related to a judgment by a Canadian court on a
decade-old copyright action assumed by us when we purchased Delrina Corporation
(See Note 6 of Notes to Condensed 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
INTEREST INCOME AND INTEREST EXPENSE
Interest income was approximately $2 million and $4 million in the quarters
ended June 30, 1999 and 1998, respectively. Interest income decreased 50% in the
quarter ended June 30, 1999 over the quarter ended June 30, 1998, primarily due
to lower average invested cash balances and losses on the sale of investments in
the June 1999 quarter.
Interest expense was less than $0.1 million and approximately $0.3 million in
the quarters ended June 30, 1999 and 1998, respectively. Interest expense
decreased due to the conversion of our convertible subordinated debentures in
February 1999, which were outstanding for the entire June 1998 quarter.
INCOME, NET OF EXPENSE, FROM SALE OF TECHNOLOGIES AND PRODUCT LINES
Income, net of expense, from sale of technologies and product lines decreased
from $15 million in June 1998 to $5 million in June 1999. This relates to
royalties from our sale of certain software products, technologies and tangible
assets to JetForm Corporation (JetForm) and the Hewlett-Packard Company (HP)
during fiscal 1997. Payments from JetForm and HP were lower in the quarter ended
June 30, 1999 over the quarter ended June 30, 1998 because the HP payments ended
in the December 1998 quarter and the payment from JetForm has declined by
approximately $6.5 million.
OTHER INCOME, NET
Other income was approximately $0.6 million and $2.6 million in the quarters
ended June 30, 1999 and 1998, respectively. Other income decreased primarily due
to foreign exchange gain realized as a result of the paydown of an intercompany
loan and other foreign currency exchange gains (losses) from fluctuations in
currency exchange rates in the June 1998 quarter.
INCOME TAX PROVISION
Excluding the impact of one-time charges, the effective tax rate on income
before income taxes for the quarters ended June 1999 and 1998 was 32%. This rate
is lower than the U.S. federal statutory tax rate primarily due to a lower
statutory tax rate on our Irish operations.
The tax provision for the quarter ended June 1999 consists of two items: a $12.2
million (or 32% effective tax rate) provision on income before income taxes and
restructuring charges of $38.2 million, and a $0.5 million tax benefit on the
$2.8 million restructuring charges. The benefit of the restructuring charges is
less than the U.S. federal statutory tax rate due to uncertainty of the
realization of a tax benefit from certain severance benefits. Similarly, the tax
provision for the quarter ended June 1998 consists of a 32% tax rate applied to
income from ongoing operations and a $1.7 million tax benefit on the $14.1
million charge for acquired in-process research and development. A valuation
allowance was established for the portion of the deferred tax asset attributable
to the acquired in-process research and development that is not expected to be
realized within five years.
LIQUIDITY AND CAPITAL RESOURCES
Cash, short-term investments and long-term investments increased $23 million to
$220 million at June 30, 1999 from $197 million at March 31, 1999. This increase
is largely due to cash provided from operating activities and net proceeds from
the exercise of stock options under the Stock Option Plans and the sales of
common stock under the Employee Stock Purchase Plan, offset by cash paid to the
remaining Quarterdeck shareholders to complete the acquisition of Quarterdeck
and for repurchases of the Company's common stock.
In addition to cash and short-term investments, we have $73 million of
restricted investments related to collateral requirements under certain lease
agreements. We are obligated under these lease agreements for two existing
office buildings, one parcel of land and one office building under construction
in Cupertino, California, to maintain a
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
restricted cash balance invested in U.S. Treasury securities with maturities not
to exceed three years. In accordance with the lease terms, these funds are not
available to meet our operating cash requirements. In addition, we are obligated
to comply with certain financial covenants. Future acquisitions may cause us to
be in violation of these financial covenants.
Net cash provided by operating activities was $56 million and was comprised of
net income of $24 million, non-cash related expenses of $12 million and a net
decrease in net assets and liabilities of $20 million.
Net trade accounts receivable decreased $16 million to $60 million at June 30,
1999 from $76 million at March 31, 1999, primarily due to improvements in
collections in each of our international regions.
On March 22, 1999, the Board authorized the repurchase of up to $75 million of
our outstanding common stock. As of June 30, 1999, we purchased 1,000,000 shares
at prices ranging from $17.90 to $19.90, for an aggregate amount of $18.7
million.
On June 9, 1998, the Board authorized the repurchase of up to 5% of our
outstanding common stock before December 31, 1998. No shares were repurchased
under this plan during the June 1998 quarter. We completed the repurchase as of
October 30, 1998, repurchasing a total of 2.875 million shares at prices ranging
from $13.10-$27.21 for an aggregate amount of approximately $56 million.
We recently renewed our $10 million line of credit which expires in May 2000. We
were in compliance with the debt covenants for this line of credit as of June
30, 1999. As of June 30, 1999, there were no borrowings and less than $1 million
of standby letters of credit outstanding under this line. Future acquisitions
may cause us to be in violation of the line of credit covenants. However, we
believe that if the line of credit is canceled or amounts are not available
under the line, there would not be a material adverse impact on our financial
results, liquidity or capital resources.
If we were to sustain significant losses, we could be required to reduce
operating expenses, which could result in product delays, reassess acquisition
opportunities, which could negatively impact our growth objectives and/or pursue
further financing options. We believe existing cash and short-term investments
and cash generated from operating activities will be sufficient to fund
operations for the next year.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have significant exposure to changing interest rates because of the
low levels of marketable securities with maturities more than 90 days on our
balance sheet. We do not undertake any specific actions to cover our exposure to
interest rate risk and we are not a party to any interest rate risk management
transactions. We do not purchase or hold any derivative financial instruments
for trading purposes.
We conduct business in 31 international currencies through our worldwide
operations. We have established a foreign currency hedging program, utilizing
foreign currency forward exchange contracts, or forward contracts, of one fiscal
month duration to hedge various foreign currency transaction exposures. Under
this program, increases or decreases in our foreign currency transactions are
offset by gains and losses on the forward contracts to mitigate the risk of
material foreign currency transaction gains and losses. We do not use forward
contracts for trading purposes. At the end of each fiscal month, all foreign
currency assets and liabilities are revalued using the month end spot rate of
the current forward contracts and the realized and unrealized gains and losses
are recorded and included in net income as a component of other income, net.
We believe that the use of foreign currency financial instruments should reduce
the risks that arise from conducting business in international markets. We
employ established policies and procedures governing the use of financial
instruments to manage our exposure to such risks.
We believe there has been no significant change in our market risk exposures as
what was previously disclosed in our Form 10-K for the year ended March 31,
1999.
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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 Condensed Consolidated Financial Statements included herein on page 9
of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as part of this Form 10-Q:
3.01 The Registrant's Restated Certificate of Incorporation.
(Incorporated by reference to Annex G filed with the Registrant's
Joint Management Information Circular and Proxy Statement (No.
000-17781) dated October 17, 1995.)
3.02 The Registrant's Bylaws, as amended and restated effective August
11, 1998. (Incorporated by reference to Exhibit 3.1 filed with the
Registrant's Current Report 8-K filed August 19, 1998.)
27.1 Financial Data Schedule for the Three Months Ended June 30, 1999.
27.2 Financial Data Schedule for the Three Months Ended June 30, 1999 (restated.)
(b) Reports on Form 8-K None.
ITEMS 2, 3, 4 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: August 13, 1999 SYMANTEC CORPORATION
By /s/ John W. Thompson
------------------------------
John W. Thompson
Chairman, President and
Chief Executive Officer
By /s/ Gregory Myers
------------------------------
Gregory Myers
Chief Financial Officer and
Chief Accounting Officer
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APPENDIX TO EXHIBITS
Exhibits. The following exhibits are filed as part of this Form 10-Q:
3.01 The Registrant's Restated Certificate of Incorporation.
(Incorporated by reference to Annex G filed with the Registrant's
Joint Management Information Circular and Proxy Statement (No.
000-17781) dated October 17, 1995.)
3.02 The Registrant's Bylaws, as amended and restated effective August
11, 1998. (Incorporated by reference to Exhibit 3.1 filed with the
Registrant's Current Report 8-K filed August 19, 1998.)
27.1 Financial Data Schedule for the Three Months Ended June 30, 1999.
27.2 Financial Data Schedule for the Three Months Ended June 30, 1998 (restated.)