1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
------- OCTOBER 1, 1999.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------- SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
________________ TO _________________.
COMMISSION FILE NUMBER 0-17781
SYMANTEC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0181864
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
20330 STEVENS CREEK BLVD.
CUPERTINO, CALIFORNIA 95014-2132
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 253-9600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, including 1,502,345 shares of Delrina exchangeable stock, as
of October 29, 1999:
COMMON STOCK, PAR VALUE $0.01 PER SHARE 58,142,899 SHARES
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SYMANTEC CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED OCTOBER 1, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 1999 and March 31, 1999....................... 3
Condensed Consolidated Statements of Income
for the three and six months ended September 30, 1999 and 1998.... 4
Condensed Consolidated Statements of Cash Flow
for the three and six months ended September 30, 1999 and 1998.... 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 34
Item 4. Submission of Matters to a Vote of Security Holders.................... 34
Item 6. Exhibits and Reports on Form 8-K....................................... 35
Signatures...................................................................... 36
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, March 31,
(In thousands) 1999 1999
- -------------- ------------- ---------
(unaudited)
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 210,259 $ 192,755
Trade accounts receivable 81,512 76,386
Inventories 6,451 6,377
Deferred income taxes 27,468 28,155
Other 12,295 12,790
--------- ---------
Total current assets 337,985 316,463
Long-term investments -- 4,270
Restricted investments 78,577 71,405
Equipment and leasehold improvements, net 56,079 52,887
Purchased product rights and capitalized software, net 37,322 36,209
Goodwill, net 100,820 75,224
Other 10,517 7,018
--------- ---------
$ 621,300 $ 563,476
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 47,400 $ 45,862
Accrued compensation and benefits 24,032 20,788
Deferred revenue 81,661 55,965
Other accrued expenses 52,002 75,954
Income taxes payable 1,531 18,339
--------- ---------
Total current liabilities 206,626 216,908
Long-term obligations 909 1,455
Commitments and contingencies
Stockholders' equity:
Preferred stock (authorized: 1,000; issued and outstanding: none) -- --
Common stock (authorized: 100,000; issued and outstanding: 57,638
and 56,872 shares, respectively) 576 569
Capital in excess of par value 340,272 315,698
Notes receivable from stockholders (24) (144)
Unearned compensation (1,001) --
Retained earnings 89,513 48,100
Accumulated other comprehensive loss (15,571) (19,110)
--------- ---------
Total stockholders' equity 413,765 345,113
--------- ---------
$ 621,300 $ 563,476
========= =========
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 Six Months Ended
September 30, September 30,
----------------------- -------------------------
(In thousands, except per share data; unaudited) 1999 1998 1999 1998
- ------------------------------------------------ ---------- --------- ---------- ----------
Net revenues $ 182,535 $ 130,034 $ 357,673 $ 267,804
Cost of revenues 30,642 21,337 61,265 41,620
--------- --------- --------- ---------
Gross margin 151,893 108,697 296,408 226,184
Operating expenses:
Research and development 27,337 25,757 54,909 50,736
Sales and marketing 75,904 70,556 149,427 140,397
General and administrative 9,968 10,124 18,754 19,256
Amortization of goodwill 5,169 827 9,104 1,102
Amortization of intangibles from acquisitions 227 5 407 7
Acquired in-process research and development 1,200 5,017 1,200 19,165
Restructuring and other expenses 40 5,105 2,813 5,105
Litigation judgment -- -- -- 5,825
--------- --------- --------- ---------
Total operating expenses 119,845 117,391 236,614 241,593
--------- --------- --------- ---------
Operating income (loss) 32,048 (8,694) 59,794 (15,409)
Interest income 2,471 3,992 4,713 8,481
Interest expense -- (320) (22) (651)
Income, net of expense, from sale of
technologies and product lines 5,010 10,027 9,900 25,348
Other (expense) income, net (397) (522) 211 2,080
--------- --------- --------- ---------
Income before income taxes 39,132 4,483 74,596 19,849
Provision for income taxes 13,300 2,538 25,037 10,289
--------- --------- --------- ---------
Net income $ 25,832 $ 1,945 $ 49,559 $ 9,560
========= ========= ========= =========
Net income per share - basic $ 0.45 $ 0.03 $ 0.87 $ 0.17
========= ========= ========= =========
Net income per share - diluted $ 0.43 $ 0.03 $ 0.84 $ 0.16
========= ========= ========= =========
Shares used to compute net income
per share - basic 57,034 57,071 56,697 57,246
========= ========= ========= =========
Shares used to compute net income
per share - diluted 60,395 58,762 59,333 59,421
========= ========= ========= =========
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
Six Months Ended
September 30,
------------------------
(In thousands; unaudited) 1999 1998
- ------------------------- ---- ----
Operating Activities:
Net income $ 49,559 $ 9,560
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of equipment and
leasehold improvements 12,876 12,433
Amortization and write-off of capitalized software development costs 6,194 1,989
Amortization of goodwill 9,104 1,102
Write-off of acquired in-process research and development 1,200 19,165
Deferred income taxes (1,781) (2,177)
Net change in assets and liabilities, excluding effects of acquisitions:
Trade accounts receivable (5,029) 584
Inventories (100) (1,072)
Other current assets 571 3,150
Other assets (512) 165
Accounts payable 1,322 3,528
Accrued compensation and benefits 4,402 (1,912)
Deferred revenue and other accrued expenses 21,955 10,704
Income taxes payable (16,692) (14,692)
Income tax benefit from stock options 7,000 --
--------- ---------
Net cash provided by operating activities 90,069 42,527
--------- ---------
Investing Activities:
Capital expenditures (15,804) (13,362)
Purchased product rights and capitalized software (700) (2,376)
Purchase of URLabs (42,100) --
Cash paid to Quarterdeck shareholders (16,394) --
Payment on purchase of IBM's anti-virus business (4,000) (8,000)
Purchase of Binary Research Limited's operations -- (27,500)
Purchases of marketable securities (20,110) (122,070)
Proceeds from sales of marketable securities 42,551 118,101
Proceeds from sales of long-term investments 4,270 --
Purchases of long-term, restricted investments (7,172) (7,666)
--------- ---------
Net cash used in investing activities (59,459) (62,873)
--------- ---------
Financing Activities:
Repurchase of common stock (18,726) (39,834)
Net proceeds from sales of common stock and other 25,859 11,248
Principal payments on long-term obligations (546) --
--------- ---------
Net cash provided by (used in) financing activities 6,587 (28,586)
--------- ---------
Effect of exchange rate fluctuations on cash and cash equivalents 1,672 (7,766)
--------- ---------
Increase (decrease) in cash and cash equivalents 38,869 (56,698)
Beginning cash and cash equivalents 153,873 139,013
--------- ---------
Ending cash and cash equivalents $ 192,742 $ 82,315
========= =========
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 September 30, 1999, and for the three and
six months ended September 30, 1999 and 1998, are unaudited and, in the opinion
of management, contain all adjustments, consisting of only normal recurring
items, necessary for the fair presentation of the financial position and results
of operations for the interim periods. These condensed consolidated financial
statements should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in Symantec's Annual Report on Form 10-K
for the year ended March 31, 1999. The results of operations for the three and
six months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the entire year. All significant intercompany
accounts and transactions have been eliminated. Certain previously reported
amounts have been reclassified to conform to the current presentation format.
Symantec has a 52/53-week fiscal accounting year. Accordingly, all references as
of and for the periods ended September 30, 1999, March 31, 1999 and September
30, 1998 reflect amounts as of and for the periods ended October 1, 1999, April
2, 1999 and October 2, 1998, respectively. The three months ended September 30,
1999 and 1998 comprised 13 weeks of activity. The six months ended September 30,
1999 and 1998 comprised 26 weeks of activity.
During the September 1999 quarter, the Company acquired Unified Research
Laboratories, Inc. (URLabs), an internet access control and email scanning
company based in Hampton, Virginia. During the December 1998 quarter, the
Company completed its tender offer for 63% interest in Quarterdeck Corporation
(Quarterdeck). In the March 1999 quarter, the Company acquired the remaining 37%
interest in Quarterdeck. During the September 1998 quarter, the Company acquired
Intel Corporation's (Intel) anti-virus business. During the June 1998 quarter,
the Company acquired International Business Machine's (IBM) anti-virus business
and the operations of Binary Research Limited (Binary) (See Note 9 of Notes to
Condensed Consolidated Financial Statements in this Form 10-Q.) Each of these
acquisitions was accounted for as a purchase. The results of operations from
these acquisitions have been included in Symantec's results of operations from
their respective dates of acquisition.
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. BALANCE SHEET INFORMATION
September 30, March 31,
(In thousands) 1999 1999
- -------------- --------- ---------
(unaudited)
Cash, cash equivalents and short-term investments:
Cash $ 87,454 $ 41,031
Cash equivalents 105,288 112,842
Short-term investments 17,517 38,882
--------- ---------
$ 210,259 $ 192,755
========= =========
Trade accounts receivable:
Receivables $ 86,761 $ 81,332
Less: allowance for doubtful accounts (5,249) (4,946)
--------- ---------
$ 81,512 $ 76,386
========= =========
Inventories:
Raw materials $ 2,078 $ 1,887
Finished goods 4,373 4,490
--------- ---------
$ 6,451 $ 6,377
========= =========
Equipment and leasehold improvements, net:
Computer hardware and software $ 147,812 $ 134,745
Office furniture and equipment 35,108 33,705
Leasehold improvements 23,900 22,516
--------- ---------
206,820 190,966
Less: accumulated depreciation and amortization (150,741) (138,079)
--------- ---------
$ 56,079 $ 52,887
========= =========
Purchased product rights and capitalized software, net:
Purchased product rights and technologies $ 53,092 $ 47,181
Capitalized software development costs 2,392 2,377
Less: accumulated amortization of purchased product rights (15,814) (11,112)
Less: accumulated amortization of capitalized software costs (2,348) (2,237)
--------- ---------
$ 37,322 $ 36,209
========= =========
Goodwill, net:
Goodwill $ 116,100 $ 81,400
Less: accumulated amortization (15,280) (6,176)
--------- ---------
$ 100,820 $ 75,224
========= =========
Accumulated other comprehensive loss:
Unrealized loss on available-for-sale investments $ (141) $ (304)
Cumulative translation adjustment (15,430) (18,806)
--------- ---------
$ (15,571) $ (19,110)
========= =========
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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 Six Months Ended
September 30, September 30,
(In thousands, except per share data; unaudited) 1999 1998 1999 1998
- ------------------------------------------------- ------- ------- ------- -------
BASIC NET INCOME PER SHARE
Net income $25,832 $ 1,945 $49,559 $ 9,560
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period 57,034 57,071 56,697 57,246
======= ======= ======= =======
Basic net income per share $ 0.45 $ 0.03 $ 0.87 $ 0.17
======= ======= ======= =======
DILUTED NET INCOME PER SHARE
Net income $25,832 $ 1,945 $49,559 $ 9,560
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period 57,034 57,071 56,697 57,246
Shares issuable from assumed exercise
of options 3,361 1,691 2,636 2,175
------- ------- ------- -------
Total shares for purpose of calculating
diluted net income per share 60,395 58,762 59,333 59,421
======= ======= ======= =======
Diluted net income per share $ 0.43 $ 0.03 $ 0.84 $ 0.16
======= ======= ======= =======
For the three months ended September 30, 1998, 1,190,000 shares issuable upon
the assumed conversion of convertible subordinated debentures and approximately
$0.2 million of interest expense were excluded from the computation of diluted
net income per share because the effect would have been anti-dilutive. For the
six months ended September 30, 1998, 1,190,000 shares issuable upon the assumed
conversion of convertible subordinated debentures and approximately $0.3 million
of interest expense were excluded from the computation of diluted net income per
share because the effect would have been anti-dilutive.
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 4. RESTRUCTURING AND OTHER EXPENSES
Restructuring and other expenses consisted of the following:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
(In thousands; unaudited) 1999 1998 1999 1998
- -------------------------- ------ ------ ------ ------
Personnel severance $ 40 $3,800 $2,813 3,800
Planned abandonment of manufacturing
facility lease -- 1,305 -- 1,305
------ ------ ------ ------
Total restructuring and other expenses $ 40 $5,105 $2,813 $5,105
====== ====== ====== ======
In the quarter ended June 1999, the Company provided for certain costs of
approximately $2.4 million related to an agreement reached with its former CEO
and other restructuring costs associated with certain regions of the Company.
During the quarter ended September 30, 1998, the Company made a decision to
restructure its operations and outsource its domestic manufacturing operations.
As a result, it recorded a $3.8 million charge for personnel severance to reduce
the workforce by approximately 5% in both domestic and international operations
and a $1.3 million charge for the planned abandonment of a manufacturing
facility lease. As of September 30, 1999, approximately $4.5 million of these
charges had been incurred, and the remaining $0.6 million was no longer
considered necessary. As a result, the Company reduced the personnel severance
accrual by $0.6 million. Also during the quarter ended September 30, 1999, the
Company provided severance of approximately $0.7 million for certain of its
employees due to the realignment of its business units. As a result of these
events in the September 1999 quarter, the net charge to personnel severance was
approximately $40,000.
NOTE 5. COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- --------------------
(In thousands; unaudited) 1999 1998 1999 1998
- --------------------------- -------- -------- -------- --------
Net income $ 25,832 $ 1,945 $ 49,559 $ 9,560
Other comprehensive income (loss):
Change in unrealized gain (loss) on
available-for-sale investments,
net of a tax (benefit) provision of ($3),
($98), $68, and ($38) (7) (208) 145 (80)
Reclassification adjustment for (gains)
losses included in net income,
net of a tax provision (benefit) of $63,
($8) and $146 -- (133) 18 (310)
Change in cumulative translation adjustment (CTA),
net of a tax provision (benefit) of $1,644,
($619), $1,589, and ($2,477) 3,494 (1,315) 3,376 (5,263)
-------- -------- -------- --------
Total other comprehensive income (loss) 3,487 (1,656) 3,539 (5,653)
-------- -------- -------- --------
Comprehensive income $ 29,319 $ 289 $ 53,098 $ 3,907
======== ======== ======== ========
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 6. RESTRICTED STOCK
In April 1999, the Company issued 100,000 shares of restricted common stock to
its new CEO. Unearned compensation of approximately $1.3 million, equivalent to
the market value of the common stock on the date of grant was charged to
stockholders' equity and will subsequently be amortized over 2 years, the
vesting period of the restricted common stock. For the three and six months
ended September 30, 1999, the Company recorded approximately $0.2 million and
$0.3 million, respectively, of expense, relating to the restricted common stock.
NOTE 7. LITIGATION AND CONTINGENCIES
On March 18, 1996, a class action complaint was filed by the law firm of
Milberg, Weiss, Bershad, Hynes & Lerach in the Superior Court of the State of
California, County of Santa Clara, against the Company and several of its
current and former officers and directors. The complaint alleges that Symantec
insiders inflated the Company's stock price and then sold stock based on inside
information that the Company's sales were not going to meet analysts'
expectations. The complaint seeks damages in an unspecified amount. The
complaint has been refiled twice in state court, most recently on January 13,
1997, following Symantec's demurrers directed to previous complaints. On January
7, 1997, the same plaintiffs filed a complaint in the United States District
Court, Northern District of California, based on the same facts as the state
court complaint, for violation of the Securities Exchange Act of 1934. The
district court dismissed that complaint and plaintiffs served an amended
complaint in April 1998. Symantec's motion to dismiss the new federal complaint
was granted in part, substantially narrowing the complaint. In July 1999, the
parties reached an agreement in principle to settle these cases on terms that
would have no material financial impact on the Company. In October 1999, the
Federal Court approved the settlement. As of September 30, 1999, the Company
believes it has adequately accrued for the settlement and related legal costs.
On April 23, 1997, Symantec filed a lawsuit against McAfee Associates, Inc.,
which pursuant to a merger has become Network Associates, Inc. (Network
Associates), in the United States District Court, Northern District of
California, for copyright infringement and unfair competition. On October 6,
1997, the court found that Symantec had demonstrated a likelihood of success on
the merits of certain copyright claims and issued a preliminary injunction (i)
prohibiting Network Associates from infringing Symantec's rights in specified
materials by marketing, selling, transferring or directly or indirectly copying
into any new Network Associates product or new version of an existing product
that has Symantec code, (ii) requiring Network Associates to notify distributors
who are still selling versions of PC Medic 97 that have Symantec's code to tell
customers that they should upgrade to versions that do not contain Symantec code
and (iii) requiring Network Associates to provide Symantec and the court with a
sample of the notice to be used. On October 17, 1997, Symantec amended its
complaint to include additional claims for copyright infringement and
misappropriation of trade secrets, based on additional evidence found in the
discovery process. On April 1, 1998, Symantec amended its complaint to add
claims for misappropriation of trade secrets, RICO (Racketeer Influenced and
Corrupt Organizations Act) and related claims based on additional evidence
uncovered in the litigation. Following motions by Network Associates, the court
dismissed Symantec's unfair competition and trade secret claims regarding the
copyrighted code and its RICO and interference claims. On October 22, 1998, the
court consolidated this case with the case against Network Associates and the
case brought by CyberMedia, both of which are described below.
On September 4, 1998, Symantec filed a new lawsuit against Network Associates in
the United States District Court, Northern District of California, for copyright
infringement, trade secret misappropriation and unfair competition. Symantec
continues to investigate the extent to which Network Associates may have
misappropriated Symantec's intellectual property and plans to aggressively
pursue its remedies under this lawsuit, which include both injunctive relief and
monetary damages.
On September 15, 1997, Hilgraeve Corporation (Hilgraeve) filed a lawsuit in the
United States District Court, Eastern District of Michigan, against Symantec,
alleging that unspecified Symantec products infringe a patent
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
owned by Hilgraeve. The lawsuit requests damages, injunctive relief, costs and
attorney fees. Symantec believes this claim has no merit and intends to defend
the action vigorously.
On February 4, 1998, CyberMedia, Inc. (CyberMedia), which in September 1998 was
acquired by Network Associates, filed a lawsuit in the United States District
Court, Northern District of California, against Symantec, ZebraSoft Inc. and
others, alleging that Symantec's Norton Uninstall Deluxe infringes CyberMedia's
copyright and asserting related state law claims. The suit requests damages,
injunctive relief, costs and attorneys fees. In May 1998, CyberMedia filed a
motion seeking a preliminary injunction prohibiting sale or development of the
challenged code, which preliminary injunction was granted with respect to
Symantec's domestic activities in September 1998. Subsequently, Symantec ceased
selling the Norton Uninstall Deluxe product. Symantec intends to defend the
action vigorously.
On February 19, 1998, a class action complaint was filed by the law firm of
Milberg, Weiss, Bershad, Hynes & Lerach in Santa Clara County Superior Court, on
behalf of a class of purchasers of pre-version 4.0 Norton AntiVirus products. A
similar complaint was filed in the same court on March 6, 1998, by an Oregon law
firm. Those actions were consolidated and a consolidated amended complaint was
filed in late October 1998. The complaint originally purported to assert claims
for breach of implied warranty, fraud, unfair business practices and violation
of California's Consumer Legal Remedies Act, among others, arising from the
alleged inability of earlier versions of Norton AntiVirus to function properly
after the year 2000. All but the unfair business practice claims have been
dismissed following Symantec's demurrer. The complaint seeks unspecified damages
and injunctive relief. Symantec believes that these actions have no merit and
intends to defend the actions vigorously.
In July 1998, the Ontario Court of Justice (General Division) ruled that
Symantec should pay a total of approximately $6.8 million for damages and legal
costs to Triolet Systems, Inc. and Brian Duncombe in a decade-old copyright
action, for damages arising from the grant of a preliminary injunction against
the defendant. The damages were awarded following the court's ruling that
evidence presented later in the case showed the injunction was not warranted.
Symantec inherited the case through its 1995 acquisition of Delrina Corporation,
which was the plaintiff in this lawsuit. Symantec has appealed the decision.
Symantec recorded a charge of $5.8 million in June 1998, representing the
unaccrued portion of the judgment plus costs. As of September 30, 1999, the
Company believes that it has adequately accrued for both the judgment and all
legal costs.
In March 1997, a class action complaint was filed against Quarterdeck in San
Diego County Superior Court. The case was later transferred to and is currently
pending in Los Angeles County Superior Court. The complaint, purportedly on
behalf of a class of purchasers of Quarterdeck's MagnaRAM2 product, seeks
damages and injunctive relief under the Consumers Legal Remedies Act and
Business and Professions Code sections beginning with 17200 and 17500. In
November 1999, the parties resolved this case with no material financial impact
on the Company.
In October 1997, a complaint was filed in the United States District Court for
the District of Utah on behalf of PowerQuest Corporation against Quarterdeck.
The complaint alleges that Quarterdeck's partitioning software (included in
Partition-It and Partition-It Extra Strength) violates a patent held by
PowerQuest. In January 1998, PowerQuest obtained a second patent relating to
partitioning and has amended its complaint to allege infringement of that patent
as well. The plaintiff seeks an injunction against distribution of Partition-It
and Partition-It Extra Strength and monetary damages. Symantec believes this
action has no merit and intends to defend the action vigorously.
On July 30, 1998, a class action complaint was filed against Quarterdeck in the
Supreme Court of the State of New York, County of New York, on behalf of a
purported class of purchasers of Procomm Plus version 4.0 for Windows product
(Product). The complaint purported to assert claims for breach of warranty and
violation of New York's Consumer Protection From Deceptive Acts and Practices
Act arising from the Product's inability to process dates containing the year
2000. The complaint was dismissed and the court entered judgment in
Quarterdeck's favor in
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
April 1999. The plaintiff has appealed the Court's decision.
Over the past few years, it has become common for software companies, including
Symantec, to receive claims of patent infringement. Symantec is currently
evaluating claims of patent infringement asserted by several parties, with
respect to certain of the Company's products. While the Company believes that it
has valid defenses to these claims, the outcome of any related litigation or
negotiation could have a material adverse impact on the Company's future results
of operations or cash flows.
Symantec is involved in a number of other judicial and administrative
proceedings incidental to its business. The Company intends to defend all of the
aforementioned pending lawsuits vigorously, and although adverse decisions (or
settlements) may occur in one or more of the cases, the final resolution of
these lawsuits, individually or in the aggregate, is not expected to have a
material adverse affect on the financial condition of the Company, although it
is not possible to estimate the possible loss or losses from each of these
cases. Depending, however, on the amount and timing of an unfavorable resolution
of these lawsuits, it is possible that the Company's future results of
operations or cash flows could be materially adversely affected in a particular
period. The Company has accrued certain estimated legal fees and expenses
related to certain of these matters; however, actual amounts may differ
materially from those estimated amounts.
NOTE 8. STOCK REPURCHASE
On March 22, 1999, the Board of Directors (the "Board") of Symantec authorized
the repurchase of up to $75 million of Symantec's outstanding common stock. As
of September 30, 1999, the Company has repurchased 1 million shares at prices
ranging from $17.90 to $19.90, for an aggregate amount of $18.7 million.
NOTE 9. ACQUISITIONS
On July 21, 1999, the Company purchased 100% of the outstanding common stock of
Unified Research Labs, Inc. for $41.5 million plus $0.6 million of acquisition
related costs. The transaction was accounted for as a purchase. Under the
transaction, Symantec recorded approximately $1.2 million for in-process
research and development, $37 million for goodwill, $5 million for capitalized
software technology and $1.6 million for other intangible assets, offset by
approximately $2.7 million in related income tax liabilities. A valuation
specialist used management's estimates to establish the amount of in-process
research and development. The goodwill and other intangibles are being amortized
over a 5-year period. For the quarter ended September 30, 1999, the Company
recorded approximately $1.2 million for goodwill amortization and approximately
$0.2 million for the amortization of other acquisition related intangible
assets.
On October 15, 1998, Symantec signed a definitive merger agreement to acquire
Quarterdeck. On November 17, 1998, the Company completed its tender offer for
the common stock of Quarterdeck acquiring an approximately 63% interest. On
March 29, 1999, Symantec acquired Quarterdeck's remaining shares through a cash
merger at the tender offer price of $0.52 per share in accordance with the
definitive merger agreement. The transaction was accounted for as a purchase.
Under the transaction, the Company recorded approximately $8 million of acquired
in-process research and development, $8 million of capitalized software
technology, $66 million of goodwill and $3 million of other intangibles. A
valuation specialist used management's estimates to establish the amount of
in-process research and development. The amounts related to workforce in place
is being amortized over 2 years. The capitalized software, goodwill and other
intangibles will be amortized over a 5-year period. In addition, Quarterdeck had
issued $25 million of 6% convertible senior subordinated notes, due in 2001, to
an institutional investor in a private placement pursuant to the terms of a Note
Agreement dated March 1, 1996. The Notes were paid in full without any premium
on March 30, 1999. For the quarter ended September 30, 1999, the Company
recorded approximately $3.9 million in amortization expense related to these
assets. For the six month period ended September 30, 1999, the Company recorded
approximately $7.7 million in amortization expense related to these assets.
12
13
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On September 28, 1998, Symantec entered into an agreement whereby it purchased
Intel Corporation's anti-virus business for approximately $16.5 million.
Symantec also licensed Intel's systems management technology which it will
combine with its own anti-virus technology to create improved anti-virus
management solutions for corporate organizations. As part of the agreement,
Intel continued to support its anti-virus customers and transitioned support to
Symantec at the end of June 1999. In addition, Intel will promote Norton
Antivirus through its worldwide reseller channels. As of September 30, 1999,
Symantec has paid approximately $12 million under the agreement. The transaction
was accounted for as a purchase. Under the transaction, Symantec recorded
approximately $5.0 million for in-process research and development acquired from
Intel, $10.7 million for capitalized software technology and $0.8 million for
certain intangible assets. The assumptions and projections made have not
significantly changed during the September 1999 quarter. A valuation specialist
used management's estimates to establish the amount of in-process research and
development. The capitalized software is being amortized over a 5-year period.
For the quarters ended September 30, 1999 and 1998, the Company recorded
approximately $0.5 million and none in amortization expense related to
capitalized software and other acquired intangibles, respectively. For the six
month periods ended September 30, 1999 and 1998, the Company recorded
approximately $1 million and none in amortization expense related to capitalized
software and other acquired intangibles, respectively.
On June 24, 1998, Symantec entered into an agreement whereby Symantec purchased
the operations of Binary, an Auckland, New Zealand based company, for $27.8
million plus $0.7 million of acquisition related costs. The transaction was
accounted for as a purchase. Under the transaction, Symantec originally recorded
approximately $7.1 million for acquired in-process research and development,
$16.9 million for capitalized software technology, with the remaining $3.8
million of the purchase price allocated to goodwill, net tangible and intangible
assets. A valuation specialist used management's estimates to establish the
amount of in-process research and development. During the June 1999 quarter, the
Company reduced the purchase price and the amount allocated to goodwill by $2.3
million due to certain changes in estimates related to acquisition related
liabilities. The assumptions and projections made have not significantly changed
during the September 1999 quarter. The capitalized software, goodwill and
intangibles are being amortized over a 4-year period. For the quarters ended
September 30, 1999 and 1998, the Company incurred approximately $1.1 million and
$1.3 million, respectively, of amortization expense related to these assets. For
the six months ended September 30, 1999 and 1998, the Company incurred
approximately $2.2 million and $1.7 million, respectively, of amortization
expense related to these assets.
Effective May 18, 1998, the Company entered into a Master Agreement with IBM to
acquire rights to IBM's digital immune technology. In addition, the Company
assumed the majority of IBM's license arrangements with customers of IBM
anti-virus products. In return for the various rights acquired from IBM, the
Company agreed to pay $16 million in installments over a specified period as
well as pay royalties on revenues received from the distribution of
immune-enabled Symantec products and immune services provided by the Company
using the digital immune technology. The royalties are subject to specified
maximums and vary by time periods with ultimate termination of royalties as of a
specified date. In addition, the Company entered into a patent cross-licensing
agreement under which the parties licensed to each other their respective patent
portfolios. The transaction was accounted for as a purchase. As of September 30,
1999, Symantec paid IBM $12 million in cash with the remaining $4 million
payable in November 1999. In addition, the Company assumed liabilities of $3
million and incurred additional expenses of approximately $1 million as part of
the transaction. Under the transaction, the Company recorded approximately $7
million for in-process research and development, $12 million for goodwill and $1
million for certain prepaid research and development and other assets. A
valuation specialist used management's estimates to establish the amount of
in-process research and development. Goodwill is being amortized over 5 years.
The assumptions and projections used for this valuation have not significantly
changed during the September 1999 quarter. For the quarters ended September 30,
1999 and 1998, the Company incurred approximately $0.9 million and $0.6 million,
respectively, of amortization expense related to these assets. For the six
months ended September
13
14
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
30, 1999 and 1998, the Company incurred approximately $1.8 million and $0.8
million, respectively, of amortization expense related to these assets.
PRO FORMA. The following unaudited pro forma results of operations for the three
and six month periods ended September 30, 1999 are as if the acquisition of
Quarterdeck had occurred at the beginning of each period presented. The pro
forma information has been prepared for comparative purposes only and is not
indicative of what operating results would have been if the acquisition had
taken place at the beginning of each period presented or of future operating
results.
Three Months Ended Six Months Ended
(In thousands, except per share data; unaudited) September 30, 1998 September 30, 1998
- ------------------------------------------------- ------------------- ------------------
Net revenues $138,886 $284,691
======== ========
Net loss $ (118) $ (2,530)
======== ========
Basic net loss per share $ (0.01) $ (0.04)
======== ========
Diluted net loss per share $ (0.01) $ (0.04)
======== ========
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, which defers the adoption of SFAS No. 133 for one
year. SFAS 133 will be effective for Symantec at the beginning of the June 2001
quarter for both annual and interim reporting periods. Symantec is evaluating
the potential impact of this accounting pronouncement on its required
disclosures and accounting practices.
NOTE 11. SEGMENT INFORMATION
Symantec markets its products in North America and international countries
primarily through retail and distribution channels. Symantec's reportable
segments are significant strategic business units that offer different products
and services, distinguished by customer needs. The Company has four reportable
segments: Remote Productivity Solutions, Security and Assistance, Internet Tools
and Corporate Sunset. There are no intersegment sales. Symantec's Chief
Executive Officer and his staff evaluate performance based on profit or loss
from operations before income taxes, not including nonrecurring gains and
losses, foreign exchange gains and losses and miscellaneous other income and
expenses. Non-segment items include all general and administrative expenses and
charges that are one-time in nature, such as acquired in-process research and
development, judgment settlements and restructuring and other expenses, and are
not allocated to the business units. Assets and liabilities are not discretely
reviewed by segment and have not significantly changed since the Company's
previously filed Form 10-K for the year ended March 31, 1999.
On June 10, 1999, the Company announced its intent to establish the Internet
Tools Business Unit as a separate company. The Company continues to evaluate
alternatives including divestiture of some or all of its assets or a spin-off
into a separate company.
14
15
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following tables summarize each segment's net revenues from external
customers, operating income (loss) and geographical information:
Remote Security Non-
Productivity and Internet Corporate Total Segment Total
(In thousands; unaudited) Solutions Assistance Tools Sunset Segments Items Company
- ------------------------ ------------ ---------- -------- --------- -------- ------- --------
Three Months Ended
September 30, 1999:
Net revenues from
external customers $ 67,434 $ 110,570 $ 4,188 $ 343 $ 182,535 $ -- $ 182,535
Operating income (loss) 27,097 30,716 (3,748) (3,268) 50,797 (18,749) 32,048
Three Months Ended
September 30, 1998:
Net revenues from
external customers 53,620 72,702 3,356 356 130,034 -- 130,034
Operating income (loss) 13,545 5,752 (5,461) 186 14,022 (22,716) (8,694)
Six Months Ended
September 30, 1999:
Net revenues from
external customers 123,615 225,535 7,943 580 357,673 -- 357,673
Operating income (loss) 41,659 67,891 (7,545) (5,853) 96,152 (36,358) 59,794
Six Months Ended
September 30, 1998:
Net revenues from
external customers 109,095 144,084 14,047 578 267,804 -- 267,804
Operating income (loss) 29,840 16,350 (3,681) (4,208) 38,301 (53,710) (15,409)
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
(In thousands; unaudited) 1999 1998 1999 1998
- ------------------------- -------- -------- -------- --------
Net revenues from external customers:
United States $100,378 $ 80,373 $200,147 $166,535
Other foreign countries 82,157 49,661 157,526 101,269
-------- -------- -------- --------
$182,535 $130,034 $357,673 $267,804
======== ======== ======== ========
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS RISK FACTORS
The following discussion contains forward-looking statements that involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others things, those risk factors set forth in this
section and elsewhere in this report. We identify forward-looking statements by
words such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or similar terms that refer to the future. We cannot guarantee future results,
levels of activity, performance or achievements.
OUR EARNINGS AND STOCK PRICE ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. Due to the
factors noted below, our earnings and stock price have been and may continue to
be subject to significant volatility, particularly on a quarterly basis. There
have been previous quarters in which we have experienced shortfalls in revenue
and earnings from levels expected by securities analysts and investors, which
have had an immediate and significant adverse effect on the trading price of our
common stock. This may occur again in the future.
OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND WE WILL NEED TO
ADAPT OUR DEVELOPMENT TO THESE CHANGES. We participate in a highly dynamic
industry characterized by rapid change and uncertainty relating to new and
emerging technologies and markets. Future technology or market changes may cause
certain of our products to become obsolete more quickly than expected.
THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE AND WE EXPECT THAT
COMPETITION WILL CONTINUE AND MAY INCREASE. It is influenced by the strategic
direction of major microcomputer hardware manufacturers and operating system
providers. Our competitiveness depends on our ability to enhance existing
products and to offer successful new products on a timely basis. We have limited
resources and must restrict product development efforts to a relatively small
number of projects.
INTRODUCTION OF NEW OPERATING SYSTEMS MAY CAUSE SIGNIFICANT FLUCTUATIONS IN OUR
FINANCIAL RESULTS AND STOCK PRICE. If we are unable to successfully and timely
develop products that operate under existing or new operating systems, or if
pending or actual releases of the new operating systems delay the purchase of
our products, our future net revenues and operating results could be materially
adversely affected.
Inclusions of features by Microsoft in new versions of Windows, such as Windows
2000 and Windows 98 Second Edition, which directly compete with our products,
may decrease or delay the demand for certain of our products, including those
currently under development and products specifically intended for Windows 2000.
Our financial results and our stock price declined significantly within
approximately 6 months after the releases of Windows 3.1, Windows 95 and Windows
98, which in some cases also caused the additional requirement for hardware
upgrades, resulting in shifts in customer spending from software to hardware. We
could face adverse financial results and additional stock price declines
following future releases of widely used operating systems.
Additionally, as hardware vendors incorporate additional server-based network
management and security tools into network operating systems, the demand may
decrease for some of our products, including those currently under development.
THE TREND TOWARD CONSOLIDATION IN OUR INDUSTRY MAY IMPEDE OUR ABILITY TO COMPETE
EFFECTIVELY. As consolidation in the software industry continues, fewer
companies compete in certain markets, changing the nature of the market and
potentially providing consumers with fewer choices. Also, some of these
companies offer a broader range of products than we do, ranging from desktop to
enterprise solutions. We may not be able to compete effectively against these
competitors. Furthermore, we use strategic acquisitions, as necessary, to
acquire technology, people and products for our overall product strategy. We
completed a number of acquisitions and dispositions of technologies, companies
and products in fiscal 1999 and in the most recent fiscal quarter. We may
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
acquire and dispose of other technologies, companies and products in the future.
The trend toward consolidation in our industry may result in increased
competition in acquiring these technologies, companies or products, resulting in
increased acquisition costs or the inability to acquire the desired
technologies, companies or products. Any of these changes may have a significant
adverse effect on our future revenues and operating results.
WE MUST EFFECTIVELY ADAPT TO CHANGES IN THE DYNAMIC TECHNOLOGICAL ENVIRONMENT OF
THE INTERNET IN A TIMELY MANNER. Critical issues concerning the commercial use
of the Internet, including security, reliability, cost, ease of use,
accessibility, quality of service or potential tax or other government
regulation, remain unresolved and may affect the use of the Internet as a medium
to distribute or support our software products and the functionality of some of
our products. If we are unsuccessful in timely assimilating changes in the
Internet environment into our business operations and product development
efforts, our future net revenues and operating results could be adversely
affected.
WE FACE INTENSE PRICE-BASED COMPETITION FOR SALES OF OUR PRODUCTS. Price
competition is often intense in the microcomputer software market, especially
for utility and anti-virus products. Many of our competitors have significantly
reduced the price of utility and anti-virus products. Price competition may
continue to increase and become even more significant in the future, resulting
in reduced profit margins.
THE TRANSITION TO INTEGRATED SUITES OF UTILITIES MAY RESULT IN REDUCED REVENUES.
Symantec and our competitors now provide integrated suites of utility products.
The price of integrated utility suites is significantly less than the aggregate
price of stand-alone products that are included in these utility suites when
sold separately. As a result of the shift to integrated utility suites, price
competition is intense and we have experienced cannibalization of our
stand-alone products that are included within the suite. As a result, this may
have had an impact on our revenues and operating income from selling integrated
utility suites rather than individual products. Additionally, our products may
not compete effectively with competitors' products or integrated utility suites
introduced in the future.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. While
our diverse product line has tended to lessen fluctuations in quarterly net
revenues, these fluctuations have occurred in the past, and may occur in the
future. Fluctuations may be caused by a number of factors, including:
o the timing of announcements and releases of new or enhanced versions
of our products and product upgrades;
o the introduction of competitive products by existing or new
competitors;
o reduced demand for any given product;
o seasonality in the end-of-period buying patterns of foreign and
domestic software markets; and
o the market's transition between operating systems.
A significant proportion of our revenues are generated during the last month of
a fiscal quarter. Most resellers tend to make a majority of their purchases at
the end of a fiscal quarter. In addition, many corporate customers negotiate
site licenses near the end of each quarter. In part, this is because these two
groups are able, or believe that they are able, to negotiate lower prices and
more favorable terms. Our reliance on a large proportion of revenue occurring at
the end of the quarter and the increase in the dollar value of transactions that
occur at the end of a quarter can result in increased uncertainty relating to
quarterly revenues. Due to this end-of-period buying pattern, forecasts may not
be achieved, either because expected sales do not occur or because they occur at
lower prices or on terms that are less favorable to us. In addition, these
factors increase the chances that our results could diverge from the
expectations of investors and analysts.
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
WE ARE DEPENDENT UPON THE RETAIL DISTRIBUTION CHANNEL. A large portion of our
sales are made through the retail distribution channel, which is subject to
events that create unpredictable fluctuations in consumer demand. Our retail
distribution customers also carry our competitors' products. These retail
distributors may have limited capital to invest in inventory. Their decisions to
purchase our products are partly a function of pricing, terms and special
promotions offered by us and our competitors, over which we have no control and
which we cannot predict.
Our agreements with distributors are generally nonexclusive and may be
terminated by the distributors or by us without cause. Some distributors and
resellers have experienced financial difficulties in the past. Distributors that
account for a significant portion of our sales may experience financial
difficulties in the future. When our distributors have experienced financial
difficulties in the past, we have successfully moved these inventories to other
distributors. However, we may not be able to do so in the future. If these
distributors do experience financial difficulties and we are unable to move
their inventories to other distributors, we may experience reduced sales or
increased write-offs, which would adversely affect our operating results.
CHANNEL FILL MAY AFFECT OUR NET REVENUES. During September 1999, we released
several new versions of our products. Our pattern of net revenues and earnings
may be affected by "channel fill." Distributors may fill their distribution
channels in anticipation of price increases, sales promotions or incentives.
Distributors, dealers and end users often delay purchases, cancel orders or
return products in anticipation of the availability of the new version or new
product. As a result, distributor inventories may decrease between the date we
announce a new version or new product and the date of release. Channels may also
become filled simply because the distributors do not sell their inventories to
retail distribution or retailers to end users as anticipated. If sales to
retailers or end-users do not occur at a sufficient rate, distributors will
delay purchases or cancel orders in later periods or return prior purchases in
order to reduce their inventories.
PRODUCT RETURNS MAY AFFECT OUR NET REVENUES. Product returns can occur when we
introduce upgrades and new versions of products or when distributors or
retailers have excess inventories. Our return policy allows distributors,
subject to various limitations, to return purchased products in exchange for new
products or for credit towards future purchases. End users may return our
products through dealers and distributors within a reasonable period from the
date of purchase for a full refund. In addition, retailers may return older
versions of our products. We estimate and maintain reserves for product returns.
Future returns could, however, exceed the reserves we have established, which
could have a material adverse affect on our operating results.
WE MAY BE UNSUCCESSFUL IN UTILIZING NEW DISTRIBUTION CHANNELS. We currently
offer a broad range of products and services over the Internet. We may not be
able to effectively adapt our existing, or adopt new, methods of distributing
our software products utilizing the rapidly evolving Internet and related
technologies. The adoption of new channels may adversely impact existing
channels and/or product pricing, which may reduce our future revenues and
profitability.
OUR INCREASED SALES OF SITE LICENSES MAY INCREASE FLUCTUATIONS IN OUR FINANCIAL
RESULTS AND COULD AFFECT OUR BUSINESS. We sell corporate site licenses through
the distribution channel and through corporate resellers. We are increasingly
emphasizing sales to corporations and small businesses through volume licensing
agreements. These licensing arrangements tend to involve a longer sales cycle
than sales through other distribution channels, require greater investment of
resources in establishing the enterprise relationship and can sometimes result
in lower operating margins. The timing of the execution of volume licenses, or
their nonrenewal or renegotiation by large customers, could cause our results of
operations to vary significantly from quarter to quarter and could have a
material adverse impact on our results of operations. In addition, if the
corporate marketplace grows and becomes a larger component of the overall
marketplace, we may not be successful in expanding our corporate segment to take
advantage of this growth.
WE MAY BE UNSUCCESSFUL IN THE ENTERPRISE MARKET. We have shifted a significant
amount of resources and products for enterprise-wide applications. This market
has significantly different characteristics from the retail desktop
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
application market on which we have concentrated in the past and will require
different skills and resources to penetrate. As this area is becoming a more
significant part of our net revenues, we may experience material adverse effect
on our operating results if we are unsuccessful in capturing and maintaining a
certain level of the enterprise market.
WE DEPEND ON DISTRIBUTION BY VALUE-ADDED RESELLERS AND INDEPENDENT SOFTWARE
VENDORS FOR A SIGNIFICANT PORTION OF OUR REVENUES. We distribute some of our
products through value added resellers and independent software vendors under
arrangements through which our products are included with these resellers' and
vendors' hardware and software products and services prior to sale by them
through retail channels. If we are unsuccessful in maintaining our current
relationships and securing license agreements with additional value added
resellers and independent software vendors, or if these resellers and vendors
are unsuccessful in selling their products and services, our future net revenues
and operating results may be adversely affected.
WE MAY EXPERIENCE DIFFICULTY INTEGRATING ACQUISITIONS. In July 1999, we
completed the acquisition of URLabs, Inc. We also completed a number of
acquisitions in fiscal 1999 and may acquire other companies and technology in
the future. We may encounter difficulties in integrating the operations and
employees of, and realizing certain economies of scale from, past and future
acquisitions. In addition, we may need to secure financing to pay for future
acquisitions. Acquisition financing may not be available on favorable terms or
at all. We typically incur significant expenses in connection with our
acquisitions. Future acquisitions may have a significant adverse impact on our
future profitability and financial resources.
WE FACE RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS. A significant portion of
our revenues, manufacturing costs and operating expenses result from
transactions outside of the United States, often in foreign currencies. As a
result, our operating results may be materially and adversely affected by
fluctuations in currency exchange rates and general uncertainty with each
country's political and economic structure.
INCREASED UTILIZATION AND COSTS OF OUR TECHNICAL SUPPORT SERVICES MAY ADVERSELY
AFFECT OUR FINANCIAL RESULTS. Like many companies in the software industry,
technical support costs comprise a significant portion of our operating costs
and expenses. Over the short term, we may be unable to respond to fluctuations
in customer demand for support services. We also may be unable to modify the
format of our support services to compete with changes in support services
provided by competitors.
THE RESULTS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE UNCERTAIN. We believe
that we will need to make significant research and development expenditures to
remain competitive. While we perform extensive usability and beta testing of new
products, the products we are currently developing or may develop in the future
may not be technologically successful. If they are not technologically
successful, our resulting products may not achieve market acceptance and our
products may not compete effectively with products of our competitors currently
in the market or introduced in the future.
THE LENGTH OF THE PRODUCT DEVELOPMENT CYCLE IS DIFFICULT TO PREDICT. The length
of our product development cycle has generally been greater than we originally
expected. We are likely to experience delays in future product development.
These delays could have a material adverse affect on the amount and timing of
future revenues.
WE MUST MANAGE AND RESTRUCTURE OUR EXPANDING OPERATIONS EFFECTIVELY. We
continually evaluate our product and corporate strategy. We have recently
undertaken and will in the future undertake organizational changes and/or
product and marketing strategy modifications. As a result of these changes, we
have experienced changes in the senior management of our principal business
units. These organizational changes increase the risk that objectives will not
be met due to the allocation of valuable limited resources to implement changes.
Further, due to the uncertain nature of any of these undertakings, these efforts
may not be successful and we may not realize any benefit from these efforts.
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
WE MUST ATTRACT AND RETAIN PERSONNEL WHILE COMPETITION FOR PERSONNEL IN OUR
INDUSTRY IS INTENSE. We believe that our future success will depend in part on
our ability to recruit and retain highly skilled management, marketing and
technical personnel, particularly as we focus on enterprise-wide applications.
Competition in recruiting personnel in the software industry is intense. To
accomplish this, we believe that we must provide personnel with a competitive
compensation package, including stock options, which requires ongoing
stockholder approval.
WE DEPEND ON OUR INTERNAL COMMUNICATIONS SYSTEMS THAT MAY BE DISRUPTED. Our
order entry and product shipping centers are geographically dispersed. If our
communications between these centers are disrupted, particularly at the end of a
fiscal quarter, we will suffer an unexpected shortfall in net revenues and a
resulting adverse impact on our operating results. Communications and Internet
connectivity disruptions may also cause delays in customer access to our
Internet-based services or product sales. A business disruption could occur as a
result of natural disasters or the interruption in service by communications
carriers and may cause delays in product development that could adversely impact
our future net revenues.
OUR SOFTWARE PRODUCTS AND WEB SITE MAY BE SUBJECT TO INTENTIONAL DISRUPTION. We
may in the future be the target of software viruses specifically designed to
impede the performance of our products. Such viruses could be created and
deployed against our products in the future. Similarly, experienced computer
programmers, or hackers, may attempt to penetrate our network security or the
security of our web site from time to time. A hacker who penetrates our network
or web site could misappropriate proprietary information or cause interruptions
of our services. We might be required to expend significant capital and other
resources to protect against, or to alleviate, problems caused by virus creators
and hackers.
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. We regard our software
as proprietary and underlying technology as proprietary. We seek to protect our
proprietary rights through a combination of confidentiality agreements and
copyright, patent, trademark and trade secret laws. However, we do not employ
technology to prevent copying of our products. Third parties may copy aspects of
our products or otherwise obtain and use our proprietary information without
authorization or develop similar technology independently. All of our products
are protected by copyright and we have a number of patents and patent
applications pending. We may not achieve the desired protection from, and third
parties may design around, our patents. In addition, existing copyright laws
afford limited practical protection. Furthermore, the laws of some foreign
countries do not offer the same level of protection of our proprietary rights as
the laws of the United States. Any legal action that we may bring to protect
proprietary information could be expensive and may distract management from
day-to-day operations.
WE ARE INVOLVED IN LITIGATION WHICH COULD, AND ANY FUTURE LITIGATION MAY, AFFECT
OUR FINANCIAL RESULTS. From time to time, we may be subject to claims that we
have infringed the intellectual property rights of others, that our products are
not Year 2000 compliant or other product liability claims, or other claims
incidental to our business. We are currently involved in a number of judicial
and administrative proceedings incidental to our business. For a discussion of
our current litigation, see Note 7 of Notes to Condensed Consolidated Financial
Statements in this Form 10-Q. We intend to defend and/or pursue all of these
lawsuits vigorously. We may suffer an unfavorable outcome in one or more of
these cases. We do not expect the final resolution of these lawsuits to have a
material adverse effect on our financial position, individually or in the
aggregate. However, depending on the amount and timing of unfavorable
resolutions of these lawsuits, our future results of operations or cash flows
could be materially adversely affected in a particular period.
INTELLECTUAL PROPERTY LITIGATION
We have been involved in disputes claiming patent infringement in the past and
are currently involved in a number of patent disputes and litigation. Although
infringement claims may ultimately prove to be without merit, they are expensive
to defend and may consume our resources or divert our attention from day-to-day
operations. If a third party alleges that we have infringed their intellectual
property rights, we may choose to litigate the claim and/or seek an appropriate
license from the third party. If we engage in litigation and the third party is
found to have a
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21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
valid patent claim against us and a license is not available on reasonable
terms, our business, operating results and financial condition may be materially
adversely affected.
YEAR 2000 - PRODUCT LIABILITY LITIGATION
We believe the software products that we currently develop and actively market
are Year 2000 compliant for significantly all functionality. However, these
products could contain errors or defects related to the Year 2000. In addition,
earlier versions of our products, those that are not the most currently released
or are not currently being developed, may not be Year 2000 compliant. We have
sold some of our older products, which are not being actively developed and
updated. These older products are also not necessarily Year 2000 compliant and
are no longer sold by us.
SOFTWARE DEFECTS AND PRODUCT LIABILITY
Software products frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. We have not
experienced any material adverse effects resulting from any of these defects or
errors to date and we test our products prior to release. Nonetheless, defects
and errors could be found in current versions of our products, future upgrades
to current products or newly developed and released products. Software defects
could result in delays in market acceptance or unexpected reprogramming costs,
which could materially adversely affect our operating results. Most of our
license agreements with customers contain provisions designed to limit our
exposure to potential product liability claims. It is possible, however, that
these provisions limiting our liability may not be valid as a result of federal,
state, local or foreign laws or ordinances or unfavorable judicial decisions. A
successful product liability claim could have a material adverse affect on
Symantec's business, operating results and financial condition.
THE CONVERSION OF THE EUROPEAN CURRENCIES TO THE EURO MAY IMPACT OUR FOREIGN
EXCHANGE HEDGING PROGRAM. On January 1, 1999, the euro became the common
currency of 11 of the 15 member countries of the European Union. The national
currencies of these 11 countries will coexist with the euro at fixed exchange
rates through December 31, 2001. Euro denominated bills and coins will be
introduced on January 1, 2002 and, by July 1, 2002, the national currencies will
no longer be legal tender. We expect that the euro will dictate changes in our
foreign exchange hedging program. These changes may lead to increased
fluctuations in foreign currency hedging results. Based on current information,
we do not believe that the euro will have a material adverse impact on our
operations or financial condition.
WE MAY EXPERIENCE REDUCED DEMAND FOR OUR PRODUCTS DUE TO CHANGES IN CUSTOMER
BEHAVIOR RESULTING FROM YEAR 2000 PREPARATION. With the increasing requirements
on Year 2000 compliance and functionality, many enterprise customers are using
their Information Technology budgets in 1999 to focus on Year 2000 issues. In
addition, our customer's Information Technology organizations may be unwilling
to deploy new software until after the Year 2000 in order to reduce the
complexity of any changes in their systems required by any actual Year 2000
failures. Either of these factors could reduce sales of our products and could
have an adverse affect on our net revenues. In addition, we may experience
significantly reduced revenues from our Norton 2000 product sales as demand may
significantly decline and could adversely affect our future operating results.
WE MAY EXPERIENCE DISRUPTION OF OUR INTERNAL SYSTEMS AS A RESULT OF THE YEAR
2000. We have completed a major evaluation of our internal applications, systems
and databases. We are modifying or replacing portions of our hardware and
associated software to enable our operational systems and networks to function
properly with respect to dates leading up to January 1, 2000, and thereafter. We
continue to evaluate interfaces between our systems and third-party systems,
such as those of key suppliers, distributors and financial institutions, for
Year 2000 functionality. In addition, the systems of other companies with which
we do business may not address Year 2000 problems on a timely basis. Based on
this, we expect the process of evaluating third-party Year 2000 compliance to be
an ongoing process. We are evaluating Year 2000 exposures of our key suppliers,
as well as our buildings and related facilities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Our Year 2000 Project is divided into several phases:
Assessment - where the vulnerability of the hardware, software, process or
service element is identified
Planning - where corrective action is determined for each vulnerable element
Remediation and Unit Test - where the corrective action is taken and initial
testing is performed
Limited System Test - where related elements are tested together, using dates
in the vulnerable range and any necessary follow-up remediation is completed
We track the progress of the Year 2000 on a sub-project level. The following
table is a summary of the completion status and currently expected completion
dates of each phase for each sub-project. The expected completion dates are
subject to the risks and uncertainties of locating and correcting errors in
complex computer systems. The actual dates on which we complete each phase may
vary significantly. Our principal software vendor will be providing delayed Year
2000 patches throughout 1999. These patches need to be tested before installing
them into our environment. In order to optimize the usage of our special test
environment and people resources, we have conservatively extended our Limited
Systems Test phase. Again, we realized that some of our primary hardware vendors
would continue to supply delayed Year 2000 fixes through 1999 and therefore we
will need to prepare accordingly. Building and related facilities dates were
modified to address the resources involved in the physical move of our World
Headquarters in the latter half of 1999. Our Japan and Asia Pacific sites are
still in the process of remediation and testing so date modifications have been
reflected accordingly. We believe that these conservative date modifications
will not impair our ability to remain in business before, throughout and beyond
the transition into the new millennium. Periodic updates regarding the Year 2000
status are provided to both the Executive Staff and Board of Directors. We
expect that the costs to complete the Year 2000 project to be approximately $2
million and will be expensed as incurred.
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 Complete Oct-Dec 1999
Japan & Asia/Pacific Complete Complete Nov 1999 Nov-Dec 1999
Desktop and Mobile Computers
Americas Complete Complete Complete Jul-Dec 1999
EMEA Complete Complete Complete Jul-Dec 1999
Japan & Asia/Pacific Complete Complete Nov 1999 Nov-Dec 1999
Buildings and Related Facilities Complete Complete Complete Jul-Dec 1999
Suppliers and Outside Services Complete Complete Complete Oct-Dec 1999
If our electric power or telephone services are interrupted for significant
periods, some of our facilities might be unable to operate. Symantec is taking
necessary steps to backup its critical sites to help alleviate any problems
associated with power and/or telephone outages. We maintain business recovery
plans for our major locations to provide for an orderly response to various
disaster scenarios. We are reviewing and augmenting these plans to provide
contingency plans for potential internal and external Year 2000 related
problems. We have completed this analysis and are currently finalizing the
associated contingency plans. These contingency plans along with Symantec's
business recovery plans are currently being rehearsed and rehearsals should be
complete by mid December 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
We believe that, following our conversion to new software and modifications of
existing computer hardware and software, we will not suffer significant
operational problems with our computer systems due to the Year 2000. However,
because testing of the Year 2000 functionality of our systems must occur in a
simulated environment, we are unable to test fully all Year 2000 interfaces and
capabilities prior to the Year 2000. If we are unexpectedly unable to complete
remaining modifications and conversions in a timely manner, Year 2000
noncompliance might materially adversely impact our operations.
We have not deferred any other information systems projects as a result of our
focus on Year 2000 compliance issues. We believe that our exposure from Year
2000 issues is not material to our business as a whole. However, if certain key
suppliers or distributors should suffer extended business interruptions due to
Year 2000 problems, we could be forced to delay product shipments.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
OVERVIEW
Symantec is a world leader in Internet security technology that provides content
security solutions to enterprise organizations. Symantec is also a leading
provider of software products for the consumer market. Our products and
solutions make users productive and keep their computers safe and reliable,
anywhere and anytime. Symantec has a 52/53-week fiscal accounting year. The
September 30, 1999 and 1998 quarters closed on October 1, 1999 and October 2,
1998, respectively, and each comprised 13 weeks of revenue and expense activity.
Each of the six month periods ended September 30, 1999 and 1998, comprised of 26
weeks of revenue and expense activity.
RESULTS OF OPERATIONS
During the September 1999 quarter, we acquired Unified Research Labs, Inc.
(URLabs). During the December 1998 quarter, we completed our tender offer for
63% interest in Quarterdeck Corporation (Quarterdeck). In the March 1999
quarter, we acquired the remaining 37% interest in Quarterdeck. During the
September 1998 quarter, we acquired Intel Corporation's (Intel) anti-virus
business. During the June 1998 quarter, we acquired International Business
Machine's (IBM) anti-virus business and Binary Research Limited's (Binary)
operations (See Note 9 of Notes to Condensed Consolidated Financial Statements
in this Form 10-Q.) The results of operations from these acquisitions have been
included in our results of operations from their respective dates of
acquisition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
The following table sets forth each item from our consolidated statements of
income as a percentage of net revenues and the percentage change in the total
amount of each item for the periods indicated:
Three Months Six Months
Ended Percent Ended Percent
September 30, Change September 30, Change
---------------- in Dollar --------------- in Dollar
1999 1998 Amounts 1999 1998 Amounts
---- ---- ------- ---- ---- -------
(Unaudited)
Net revenues 100% 100% 40% 100% 100% 34%
Cost of revenues 17 16 44 17 15 47
--- --- ---- ----
Gross margin 83 84 40 83 85 31
Operating expenses:
Research and development 15 20 6 15 19 8
Sales and marketing 42 54 8 42 52 6
General and administrative 5 8 (1) 5 7 (3)
Amortization of goodwill 3 1 525 3 1 726
Amortization of intangibles from acquisitions -- -- * -- -- *
Acquired in-process research and development 1 4 (76) -- 7 (94)
Restructuring and other expenses -- 4 (99) 1 2 (45)
Litigation judgment -- -- -- -- 2 *
--- --- ---- ----
Total operating expenses 66 91 2 66 90 (2)
--- --- ---- ----
Operating income (loss) 17 (7) (469) 17 (5) (488)
Interest income 1 2 (38) 1 3 (44)
Interest expense -- -- * -- -- *
Income, net of expense, from sale of technologies
and product lines 3 8 (50) 3 9 (61)
Other (expense) income, net -- -- (24) -- 1 (90)
--- --- ---- ----
Income before income taxes 21 3 773 21 8 276
Provision for income taxes 7 2 424 7 4 143
--- --- ---- ----
Net income 14% 1% 1,228 14% 4% 418
=== === ==== ====
* percentage change is not meaningful.
NET REVENUES
Net revenues increased 40% to $183 million in the September 1999 quarter from
$130 million in the September 1998 quarter. The increase in total revenues was
due to strong growth in our three principal business units, Security and
Assistance, Remote Productivity Solutions and Internet Tools, with the largest
increase in both dollars and percentage in our Security and Assistance business
unit due to strong growth in the anti-virus market, fuelled by several new
product version releases and an increase in our corporate sales.
Net revenues increased 34% to $358 million in the six month period ended
September 30, 1999 from $268 million in the comparable period ended September
30, 1998. The increase in total revenue was also due to strong growth in our
Security and Assistance and Remote Productivity Solutions business units due to
increased demand for anti-virus products and significant growth in our corporate
sales.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
BUSINESS UNITS
The Security and Assistance business unit is dedicated to being the leader in
Internet security technology and being indispensable to customers' daily use of
computers by increasing productivity and keeping computers safe and reliable.
The Security and Assistance business unit comprised approximately 61% and 56% of
net revenues in the quarters ended September 30, 1999 and 1998, respectively.
The Security and Assistance business unit comprised approximately 63% and 54% of
net revenues in the six month periods ended September 30, 1999 and 1998,
respectively. Increased net revenues for this business unit in both the three
and six month periods ended September 30, 1999, compared to the three and six
month periods ended September 30, 1998, were primarily related to outbreaks of
significant viruses, resulting in an increase in sales of Norton AntiVirus and
Norton SystemWorks. In addition, the Norton Ghost product (disk-cloning
technology), acquired as part of the Binary agreement in fiscal 1999, and Norton
2000, have shown significant growth, partially offset by decreases in sales of
Norton Utilities and MAC products.
The Remote Productivity Solutions business unit helps remote professionals
remain productive and work reliably, anywhere and anytime. The Remote
Productivity Solutions business unit comprised approximately 37% and 41% of net
revenues for the quarters ended September 30, 1999 and 1998, respectively. The
Remote Productivity Solutions business unit comprised approximately 35% and 41%
of net revenues for the six months ended September 30, 1999 and 1998,
respectively. Although revenues decreased as a percentage of total revenues,
absolute dollar revenue for this business unit increased 20% and 13% for the
three and six month periods as compared to their same periods in the prior year,
respectively. The increase in sales is primarily related to significant growth
in sales of pcANYWHERE, as a new release was introduced in June 1999, partially
offset by decreased sales in ACT! and the Winfax products.
Internet Tools, which primarily are products providing an easy to use Java
development environment, comprised approximately 2% and 3% of net revenues in
the quarters ended September 30, 1999 and 1998, respectively, and 2% and 5% for
the six month periods ended September 30, 1999 and 1998, respectively. Although
the net revenues decreased as a percentage of revenue, net revenues increased in
absolute dollars by 12% for the quarter ended September 30, 1999 compared to the
quarter ended September 30, 1998. This business unit's net revenues were lower
in the six month period ended September 30, 1999 than in the six month period
ended September 30, 1998, primarily due to a $6 million license contract with a
single customer, which occurred in the June 1998 quarter.
INTERNATIONAL
Net revenues from international sales outside of North America were $75 million
and $45 million and represented 41% and 36% of total net revenues in the
quarters ended September 30, 1999 and 1998, respectively. Net revenues from
international sales outside of North America were $143 million and $93 million
and represented 40% and 35% of total net revenues in the six month periods ended
September 30, 1999 and 1998, respectively. These increases in net revenues were
the result of strong sales growth in Europe, Middle East and Africa (EMEA),
Japan and the Asia/Pacific regions. The EMEA, Japan and Asia/Pacific regions had
growth in net revenues of 52%, 64% and 92%, respectively, for the quarter ended
September 30, 1999 compared to the quarter ended September 30, 1998, with
increases in revenues of 50%, 53%, 90%, respectively, for the six month period
ended September 30, 1999 compared to the comparable periods ended September 30,
1998. These increases in revenues were driven primarily by growth in sales of
pcANYWHERE and Norton AntiVirus products.
GROSS MARGIN
Gross margin represents net revenues less cost of revenues. Cost of revenues
consists primarily of manufacturing expenses, costs for producing manuals,
packaging costs, royalties paid to third parties under publishing contracts and
amortization and write-off of capitalized software and purchased product rights
and technologies, including those acquired in business combinations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Gross margin decreased slightly to 83% of net revenues in the September 1999
quarter from 84% in the September 1998 quarter. Gross margin decreased to 83%
for the six month period ended September 30, 1999 from 85% for the six month
period ended September 30, 1998. Factors contributing to the decrease in gross
margin percentage include a change in product mix and increased price
competition. Gross margin was also adversely impacted by increased royalty
expense from products sold with higher royalty rates than those sold in the
quarter and six months ended September 1998, primarily from increased sales of
the Norton 2000 product. In addition, technical support costs related to
corporate sales increased as the mix of corporate sales increased. These
increases in cost of sales were partially offset by certain packaging cost
reductions.
During the September 1999 quarter, we capitalized approximately $6.6 million of
software technology as part of our acquisition of URLabs. During the September
1998 quarter, we capitalized $10.7 million of software technology acquired as
part of our acquisition of Intel's anti-virus business. During the June 1998
quarter, we capitalized $16.9 million of software technology acquired as part of
our acquisition of certain assets of Binary. Amortization of capitalized
software, including amortization and write-off of both purchased product rights,
technologies and capitalized software development costs totaled approximately $2
and $1 million for the September 1999 and 1998 quarters, respectively, and
approximately $4 and $1 million for the six month periods ended September 30,
1999 and 1998, respectively. Prior to consideration of any future fiscal 2000
acquisitions, we expect to expense approximately $2.3 million of capitalized
software amortization per quarter for the next 11 quarters, decreasing over each
of the remaining 9 quarters.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were 15% and 20% of net revenues for the three
months ended September 30, 1999 and 1998, respectively, and 15% and 19% of net
revenues in the six months ended September 30, 1999 and 1998, respectively. The
decrease as a percentage of net revenues resulted primarily from the increases
in net revenues in the most recent periods.
Although as a percentage of net revenues research and development expenses
decreased, absolute dollars increased 6% to $27 million in the September 1999
quarter from $26 million in the September 1998 quarter. Absolute dollars
increased 8% to $55 million in the six months ended September 1999 from $51
million in the comparable September 1998 period. The increases in both the three
and six month periods were primarily due to increases in employee related
expenses during the September 1999 quarter. We also incurred additional costs
related to legal expenses for product claims in the September 1998 quarter.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were 42% and 54% of net revenues for the three
months ended September 30, 1999 and 1998, respectively, and 42% and 52% of net
revenues for the six month periods ended September 30, 1999 and 1998,
respectively. The decrease as a percentage of net revenues resulted primarily
from the increases in net revenues in the most recent periods.
Sales and marketing expenses increased 8% from $71 million in the September 1998
quarter to $76 million in the September 1999 quarter. Sales and marketing
expenses increased 6% to $149 million in the six month period ended September
1999 from $140 million in the six month period ended September 1998. The
increases in sales and marketing expenses for both the three and six month
periods were due primarily to growth in overall head count, salaries and
commissions, offset by a reduction in consulting services related to certain
marketing and promotional activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 5% and 8% of net revenues in the three
month periods ended September 1999 and 1998, respectively, and 5% and 7% of net
revenues in the six month periods ended September 1999 and 1998, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
General and Administrative expenses decreased 1% and remained at approximately
$10 million for both three month periods ended September 1999 and 1998. General
and administrative expenses decreased 3% and totaled approximately $19 million
in both the September 1999 and 1998 six month periods.
AMORTIZATION OF GOODWILL AND INTANGIBLES FROM ACQUISITIONS
Amortization of goodwill and intangibles from acquisitions increased
approximately $5 million from $0.8 million in the September 1998 quarter to $5.4
million in the September 1999 quarter. Amortization of goodwill and intangibles
from acquisitions increased approximately $8 million from $1.1 million for the
six month period ended September 30, 1998 to $9.5 million in the six month
period ended September 30, 1999. The increases in both three and six month
periods were due to capitalization of additional goodwill and other intangibles
from the acquisitions we made during fiscal 1999 and the URLabs acquisition we
completed in the September 1999 quarter. Prior to consideration of any future
fiscal 2000 acquisitions, we expect continued amortization of goodwill and other
intangibles related to these acquisitions to be approximately $5.8 million over
the following 11 quarters reducing over each of the remaining 9 quarters (see
Note 9 of Notes to Condensed Consolidated Financial Statements in this Form
10-Q.)
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES
Acquired in-process research and development expenses were approximately $1.2
million in the three and six month periods ended September 30, 1999, in
connection with our acquisition of URLabs. Acquired in-process research and
development expenses were approximately $5 million in the three month period
ended September 30, 1998 in connection with our acquisition of Intel's
anti-virus business. In the June 1998 quarter, we recognized acquired in-process
research and development expenses of $7.1 million in connection with our
acquisition of certain assets and technologies of IBM, and a similar amount in
connection with our acquisition of the assets and technologies of Binary (see
Note 9 of Notes to Condensed Consolidated Financial Statements in this Form
10-Q.) The assumptions and projections made in relation to these fiscal 1999
acquisitions have not significantly changed.
The in-process technology acquired in the URLabs acquisition primarily consisted
of research and development related to the next generation of URLab's two main
products, I-Gear 3.5 and Mail Gear 1.2, which are both scheduled to be released
in the fourth quarter of calendar 1999. The I-Gear product line and Mail Gear
product lines are designed for content management use in URL filtering and
E-mail filtering, respectively. URLab's research and development was focused on
providing more robust features in its development of the next generation
products of I-Gear 3.5 and Mail Gear 1.2.
We determined the fair value of the in-process technology for each of the
acquisitions by estimating the projected cash flows related to these projects,
including the cost to complete the in-process technologies and future revenues
to be earned upon commercialization of the products. We then discounted the
resulting cash flows back to their net present values and based the net cash
flows from such projects on our analysis of the respective markets and estimates
of revenues and operating profits related to these projects.
We assumed that revenue attributable to URLab's in-process technology will be
approximately $4 million in the first year and increase in the second and third
years of the 5-year projection period at annual rates of 77% and 40%,
respectively, and then decrease at rates of 2% and 38% over the remaining two
periods. We projected annual revenues to range from approximately $4 million to
$11 million over the projected period. These projections were based on:
o aggregate growth rates for the business as a whole;
o individual product revenues;
o anticipated product development cycles; and
o the life of the underlying technology.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
We estimated selling, general and administrative expenses for the in-process
technology to be approximately 69%, as a percentage of revenue in the first
year, reducing to approximately 50% in each of the remaining 4 years of the
5-year projection period.
We projected operating profit before acquisition related amortization charges to
increase from less than $1 million during the first year to approximately $2.5
million during the third year. We projected that operating profits would then
decrease from 7% to 35% during the remaining two years, resulting in profits of
approximately $2.4 million and $1.5 million, respectively. Because we assumed
that most product development costs would be incurred in the first year,
reducing operating expenses as a percentage of revenue in later years, we
anticipate operating profit to increase faster than revenue in the early years.
We estimated costs to be incurred to reach technological feasibility of the
in-process technologies from URLabs as of the date of the acquisition to total
approximately $0.2 million. We estimated the in-process technology to be between
30%-40% complete at that time. We project the introduction of acquired
in-process technologies in the marketplace during calendar year 2000, although
we cannot be sure that the introduction will be made as scheduled.
A discount rate of 30% was used for valuing the in-process technologies from
URLabs, which we believe reflects the risk associated with the completion of
these research and development projects and the estimated future economic
benefits to be generated subsequent to their completion. This discount rate is
higher than our weighted average cost of capital of 25%, due to the fact that
the technology had not reached technological feasibility as of the date of the
valuation.
The assumptions and projections discussed for the technologies acquired from
URLabs were made based on information available at the time and should not be
taken as indications of actual results, which could vary materially based on the
risks and uncertainties identified in the risk factors set forth in this Form
10-Q.
The nature of the efforts required to develop the acquired in-process technology
principally relate to the completion of all planning, designing, development and
testing activities that are necessary to establish that the product or service
can be produced to meet its design specifications including features, functions
and performance. We expect the acquired in-process technology to be developed
into commercially feasible products. However, there are no assurances that this
will occur. Failure to complete these products in their entirety, or in a timely
manner, could have a material adverse impact on our operating results, financial
condition and results of operations. Additionally, the value of the other
intangible assets may become impaired.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESTRUCTURING AND OTHER EXPENSES
Restructuring and other expenses consisted of the following:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
(In thousands; unaudited) 1999 1998 1999 1998
- -------------------------------------- ------ ------ ------ ------
Personnel severance $ 40 $3,800 $2,813 $3,800
Planned abandonment of manufacturing
facility lease -- 1,305 -- 1,305
------ ------ ------ ------
Total restructuring and other expenses $ 40 $5,105 $2,813 $5,105
====== ====== ====== ======
In the quarter ended June 1999, we provided for certain costs of approximately
$2.4 million related to an agreement reached with our former CEO, and other
restructuring costs associated with certain of our regions.
During the quarter ended September 30, 1998, we made a decision to restructure
our operations and outsource our domestic manufacturing operations. As a result,
we recorded a $3.8 million charge for personnel severance to reduce the
workforce by approximately 5% in both domestic and international operations and
a $1.3 million charge for the planned abandonment of a manufacturing facility
lease. As of September 30, 1999, approximately $4.5 million of these charges had
been incurred, and the remaining $0.6 million was no longer considered
necessary. As a result, we reduced the personnel severance accrual by $0.6
million. Also during the quarter ended September 30, 1999, we provided severance
of approximately $0.7 million for certain of our employees due to the
realignment of our business units. As a result of these events in the September
1999 quarter, the net charge to personnel severance was approximately $40,000.
LITIGATION JUDGMENT
Litigation judgment expenses totaled $5.8 million in the June 1998 quarter.
These expenses related to a judgment by a Canadian court on a decade-old
copyright action assumed by us when we acquired Delrina Corporation (see Note 7
of Notes to Condensed Consolidated Financial Statements in this Form 10-Q.)
INTEREST INCOME AND INTEREST EXPENSE
Interest income was approximately $2 million and $4 million in the three months
ended September 30, 1999 and 1998, respectively. Interest income decreased 38%
in the quarter ended September 30, 1999, over the quarter ended September 30,
1998. Interest income was approximately $5 million and $8 million in the six
month periods ended September 30, 1999 and 1998, respectively. Interest income
decreased 44% in the six month period ended September 30, 1999, over the six
month period ended September 30, 1998. Decreases in both the three and six month
periods in September 1999 over September 1998 were primarily due to higher
average invested cash balances and realized gains on the sale of investments in
the three and six month periods ended September 1998.
Interest expense was $0.3 million in the three month period ended September 30,
1998. Interest expense was $0.7 million in the six month period ended September
30, 1998. There was minimal interest expense in the three and six month periods
ended September 30, 1999. The decreases in interest expense in both the three
and six month periods were primarily due to conversion of our convertible
subordinated debentures at the end of fiscal 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
INCOME, NET OF EXPENSE, FROM SALE OF TECHNOLOGIES AND PRODUCT LINES
Income, net of expense, from sale of technologies and product lines decreased
from $10 million in the three month period ended September 30, 1998 to $5
million in the three month period ended September 30, 1999. Income, net of
expense, from sale of technologies and product lines decreased from $25 million
to $10 million in the six month periods ended September 30, 1999 and 1998,
respectively. These relate to royalties from our sale of certain software
products, technologies and tangible assets to JetForm Corporation (JetForm) and
the Hewlett-Packard Company (HP) during fiscal 1997. Payments from JetForm and
HP were lower in the quarter and six months ended September 30, 1999, compared
to the same periods ended September 30, 1998, as the HP payments ended in the
December 1998 quarter and the payments from JetForm have declined in accordance
with the payment terms.
OTHER (EXPENSE) INCOME, NET
Other (expense) income, net remained flat at less than $1 million for the
quarters ended September 30, 1999 and 1998. Other (expense) income, net
decreased from $2 million for the six months ended September 30, 1998 to $0.2
million for the six month period ended September 30, 1999. Other (expense)
income decreased primarily due to a foreign exchange gain realized as a result
of the paydown of an intercompany loan and other foreign currency exchange gains
(losses) from fluctuations in currency exchange rates in the June 1998 quarter.
INCOME TAX PROVISION
Excluding the impact of acquired in-process research and development charges,
the effective tax rate on income before income taxes was 33% for the three and
six months ended September 30, 1999, and 32% for the three and six months ended
September 30, 1998. These rates are lower than the U.S. federal statutory tax
rate primarily due to a lower statutory tax rate on our Irish operations.
The tax provision for the six months ended September 1999 consists of two items:
a $25.5 million (or 33% effective tax rate) provision on income before income
taxes, restructuring charges and acquired in-process research and development
charges of $78.6 million, and a $0.5 million tax benefit on the $4.0 million of
restructuring charges and acquired in-process research and development charges.
The tax benefit on the restructuring charges and acquired in-process research
and development charges is less than the U.S. federal statutory tax rate due to
certain non-deductible acquired in-process research and development charges and
certain non-deductible restructuring charges.
Similarly, the tax provision for the six months ended September 1998 consists of
a 32% tax rate applied to income from ongoing operations and a $2.2 million tax
benefit on the $19.1 million charge for acquired in-process research and
development. A valuation allowance was established for the portion of the
deferred tax asset attributable to the acquired in-process research and
development that is not expected to be realized within five years.
LIQUIDITY AND CAPITAL RESOURCES
Cash, short-term investments and long-term investments increased $13 million to
$210 million at September 30, 1999 from $197 million at March 31, 1999. This
increase is largely due to cash provided from operating activities and net
proceeds from the exercise of stock options under the Stock Option Plans and the
sales of common stock under the Employee Stock Purchase Plan, offset by cash
paid to the remaining Quarterdeck shareholders to complete the acquisition of
Quarterdeck, capital expenditures, repurchases of our common stock, and the
acquisition of URLabs.
In addition to cash and short-term investments, we have $79 million of
restricted investments related to collateral requirements under certain lease
agreements. Subsequent to the transfer of one of our World Headquarters office
buildings and the move to a new office building, we are now obligated under
these lease agreements for two office
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
buildings in Cupertino, California, to maintain a restricted cash balance
invested in U.S. Treasury securities with maturities not to exceed three years.
In accordance with the lease terms, these funds are not available to meet our
operating cash requirements. In addition, we are obligated to comply with
certain financial covenants. Future acquisitions may cause us to be in violation
of these financial covenants.
As of September 23, 1999, we amended our $10 million line of credit which
expires in May 2000, amending certain financial covenants as a result of our
acquisition of URLabs. We were in compliance with the debt covenants for this
line of credit as of September 30, 1999. As of September 30, 1999, there were no
borrowings and less than $1 million of standby letters of credit outstanding
under this line. Future acquisitions may cause us to be in violation of the line
of credit covenants. However, we believe that if the line of credit is canceled
or amounts are not available under the line, there would not be a material
adverse impact on our financial results, liquidity or capital resources.
Net cash provided by operating activities was $90 million and was comprised of
net income of $50 million, non-cash related expenses of $27 million and a net
change in net assets and liabilities of $13 million.
Net trade accounts receivable increased $6 million to $82 million at September
30, 1999, from $76 million at March 31, 1999, primarily due to an increase in
revenues in September 1999 compared to March 1999 in most of our regions.
On March 22, 1999, the Board authorized the repurchase of up to $75 million of
our outstanding common stock. As of September 30, 1999, we have purchased 1
million shares at prices ranging from $17.90 to $19.90, for an aggregate amount
of $18.7 million.
On June 9, 1998, the Board authorized the repurchase of up to 5% of our
outstanding common stock before December 31, 1998. No shares were repurchased
under this plan during the June 1998 quarter. During the September 1998 quarter,
we purchased 1.7 million shares at prices ranging from $17.13 to $27.21 for an
aggregate amount of approximately $40 million. We completed the repurchase as of
October 30, 1998, repurchasing a total of 2.9 million shares at prices ranging
from $13.10-$27.21 for an aggregate amount of approximately $56 million.
If we were to sustain significant losses, we could be required to reduce
operating expenses, which could result in product delays and a reassessment of
acquisition opportunities, which could negatively impact our growth objectives
and/or pursuit of further financing options. We believe existing cash and
short-term investments and cash generated from operating activities will be
sufficient to fund operations for the next year.
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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 7 of
Notes to Condensed Consolidated Financial Statements included herein on page 10
of this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of stockholders of Symantec was held on September 15,
1999. (b) Matters voted on at the meeting and votes cast on each were as
follows:
Total Vote Authority
Total Vote Withheld Withheld
For Each From Each From All
Director Director Nominees
---------- ---------- ---------
1. To elect seven directors to Symantec's
Board of Directors, each to hold office
until his or her successor is elected and
qualified or until his or her earlier
resignation or removal.
Tania Amochaev.............................. 51,230,945 471,046 --
Charles M. Boesenberg....................... 51,020,320 681,670 --
Walter W. Bregman........................... 51,211,701 490,290 --
Carl D. Carman.............................. 51,227,273 474,718 --
Robert R. B. Dykes.......................... 51,231,020 470,971 --
Robert S. Miller............................ 51,223,372 478,619 --
John W. Thompson............................ 51,238,405 463,586 --
Broker
For Against Abstain "Non-Votes"
---------- ---------- --------- -----------
2. To consider and act upon a proposal 22,066,404 17,639,398 134,337 --
to (i) amend Symantec's 1996 Equity
Incentive Plan (the "96 Plan") to make
available for issuance an additional
3,211,400 shares of Symantec Common
Stock, which will raise the 96 Plan's
limit on shares that may be issued
pursuant to awards granted from
9,001,802 to 12,213,202.
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Broker
For Against Abstain "Non-Votes"
---------- ---------- --------- -----------
3. To consider and act upon a proposal to 28,146,074 11,810,250 130,844 --
amend Symantec's 1998 Employee Stock
Purchase Plan (the "Stock Purchase
Plan") to make available for issuance
an additional 760,000 shares of
Symantec Common Stock, which will
raise the Stock Purchase Plan's limit
by 1% of Symantec's outstanding
shares on each January 1, during the
term of the Stock Purchase Plan.
4. To consider and act upon a proposal to 51,587,481 49,389 65,914 --
ratify the Board of Director's selection
of Ernst & Young LLP as Symantec's
independent auditors for the 2000
fiscal year.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as part of this Form 10-Q:
10.01 Fifth Amendment to Lease, dated as of June 24, 1999, by and
between Colorado Place Partners, LLC and Symantec Corporation,
regarding property located in Santa Monica, California.
10.02 Sixth Amendment to Credit Agreement, dated as of September 23,
1999, by and between Symantec Corporation and Bank of America,
N.A.
10.03 Limited Waiver and Amendment, dated as of September 30, 1999, by
and among Symantec Corporation, Sumitomo Bank Lease and Finance,
Inc., The Bank of Nova Scotia, and The Sumitomo Bank, Limited.
27.1 Financial Data Schedule for the Six Months Ended September 30, 1999.
(b) Reports on Form 8-K
None.
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: November 11, 1999 SYMANTEC CORPORATION
By /s/ John W. Thompson
------------------------------
John W. Thompson
Chairman, President and
Chief Executive Officer
By /s/ Gregory Myers
------------------------------
Gregory Myers
Chief Financial Officer and
Chief Accounting Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.01 Fifth Amendment to Lease, dated as of June 24, 1999, by and
between Colorado Place Partners, LLC and Symantec Corporation,
regarding property located in Santa Monica, California.
10.02 Sixth Amendment to Credit Agreement, dated as of September
23, 1999, by and between Symantec Corporation and Bank of America,
N.A.
10.03 Limited Waiver and Amendment, dated as of September 30, 1999, by
and among Symantec Corporation, Sumitomo Bank Lease and Finance,
Inc., The Bank of Nova Scotia, and The Sumitomo Bank, Limited.
27.1 Financial Data Schedule for the Six Months Ended September 30, 1999.