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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 Or 15(D) OF THE SECURITIES EXCHANGE
ACT of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2000.
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
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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
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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 1,305,585 shares of Delrina
exchangeable stock, as of October 27, 2000:
COMMON STOCK, PAR VALUE $0.01 PER SHARE 61,139,466 SHARES
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SYMANTEC CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 29, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 2000 and March 31, 2000....................................... 3
Condensed Consolidated Statements of Income
for the three and six months ended September 30, 2000 and 1999..................... 4
Condensed Consolidated Statements of Cash Flow
for the six months ended September 30, 2000 and 1999............................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................. 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders..................................... 28
Item 6. Exhibits and Reports on Form 8-K........................................................ 29
Signatures....................................................................................... 30
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, March 31,
(In thousands) 2000 2000
------------- ---------
ASSETS (unaudited)
Current assets:
Cash, cash equivalents and short-term investments $ 507,829 $ 431,550
Trade accounts receivable 92,599 47,266
Inventories 2,895 5,675
Deferred income taxes 45,363 40,189
Other 23,159 20,857
--------- ---------
Total current assets 671,845 545,537
Restricted investments 72,168 81,956
Equipment and leasehold improvements, net 61,198 51,905
Deferred income taxes 38,827 38,827
Acquired product rights, net 28,993 34,070
Goodwill, net 73,118 82,972
Other 27,803 10,760
--------- ---------
$ 973,952 $ 846,027
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 52,745 $ 43,030
Accrued compensation and benefits 25,517 25,714
Deferred revenue 121,912 90,813
Other accrued expenses 43,446 61,594
Income taxes payable 34,977 5,366
--------- ---------
Total current liabilities 278,597 226,517
Long-term obligations 2,712 1,553
Commitments and contingencies
Stockholders' equity:
Preferred stock (authorized: 1,000; issued and outstanding: none) -- --
Common stock (authorized: 100,000; issued and outstanding: 61,098
and 60,309 shares, respectively) 611 603
Capital in excess of par value 452,729 435,663
Notes receivable from stockholders -- (24)
Unearned compensation (352) (677)
Retained earnings 287,610 210,099
Accumulated other comprehensive loss (47,955) (27,707)
--------- ---------
Total stockholders' equity 692,643 617,957
--------- ---------
$ 973,952 $ 846,027
========= =========
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) 2000 1999 2000 1999
--------- --------- -------- --------
Net revenues $ 192,296 $ 182,535 $383,654 $357,673
Cost of revenues 26,608 30,642 54,445 61,265
--------- --------- -------- --------
Gross margin 165,688 151,893 329,209 296,408
Operating expenses:
Research and development 28,711 27,337 54,480 54,909
Sales and marketing 75,421 75,904 152,396 149,427
General and administrative 9,651 9,968 19,652 18,754
Amortization of goodwill 5,202 5,169 10,377 9,104
Amortization of other intangibles from acquisitions 280 227 560 407
Acquired in-process research and development -- 1,200 -- 1,200
Restructuring and other expenses -- 40 -- 2,813
--------- --------- -------- --------
Total operating expenses 119,265 119,845 237,465 236,614
--------- --------- -------- --------
Operating income 46,423 32,048 91,744 59,794
Interest income 7,957 2,471 14,709 4,691
Income, net of expense, from sale of
technologies and product lines 5,284 5,010 11,198 9,900
Other (expense) income, net (292) (397) 27 211
--------- --------- -------- --------
Income before income taxes 59,372 39,132 117,678 74,596
Provision for income taxes 20,259 13,300 40,168 25,037
--------- --------- -------- --------
Net income $ 39,113 $ 25,832 $ 77,510 $ 49,559
========= ========= ======== ========
Net income per share - basic $ 0.64 $ 0.45 $ 1.28 $ 0.87
========= ========= ======== ========
Net income per share - diluted $ 0.61 $ 0.43 $ 1.21 $ 0.84
========= ========= ======== ========
Shares used to compute net income
per share - basic 61,011 57,034 60,754 56,697
========= ========= ======== ========
Shares used to compute net income
per share - diluted 63,948 60,395 64,094 59,333
========= ========= ======== ========
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) 2000 1999
--------- ---------
Operating Activities:
Net income $ 77,510 $ 49,559
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of equipment and
leasehold improvements 14,752 12,876
Amortization and write-off of capitalized software development costs 5,425 6,194
Amortization of goodwill 10,377 9,104
Write-off of acquired in-process research and development -- 1,200
Deferred income taxes (1,051) (1,781)
Net change in assets and liabilities, excluding effects of acquisitions:
Trade accounts receivable (48,164) (5,029)
Inventories 2,631 (100)
Other current assets (2,697) 571
Other assets 807 (512)
Accounts payable 11,228 1,322
Accrued compensation and benefits 186 4,402
Other accrued expenses (13,217) (3,741)
Deferred revenue 31,099 25,696
Income taxes payable 30,392 (16,692)
Income taxes benefit from stock options 1,436 7,000
--------- ---------
Net cash provided by operating activities 120,714 90,069
--------- ---------
Investing Activities:
Capital expenditures (25,264) (15,804)
Purchased intangibles (473) (700)
Cash paid to 20/20 Software shareholders (500) --
Purchase of URLabs -- (42,100)
Cash paid to Quarterdeck shareholders -- (16,394)
Payment of note related to purchase of IBM's anti-virus business -- (4,000)
Purchases of marketable securities (393,300) (20,110)
Proceeds from sales of marketable securities 267,870 42,551
Proceeds from sales of long-term, restricted investments and other investments 9,788 4,270
Purchases of long-term, restricted investments, and other investments (18,000) (7,172)
--------- ---------
Net cash used in investing activities (159,879) (59,459)
--------- ---------
Financing Activities:
Net proceeds from sales of common stock and other 15,986 25,859
Principal payments on long-term obligations (181) (546)
Repurchases of common stock -- (18,726)
--------- ---------
Net cash provided by financing activities 15,805 6,587
Effect of exchange rate fluctuations on cash and cash equivalents (3,114) 1,672
--------- ---------
(Decrease) increase in cash and cash equivalents (26,474) 38,869
Beginning cash and cash equivalents 104,000 153,873
--------- ---------
Ending cash and cash equivalents $ 77,526 $ 192,742
========= =========
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, 2000, and for the three and
six months ended September 30, 2000 and 1999, 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, 2000. The results of operations for the three and
six months ended September 30, 2000 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, 2000, March 31, 2000 and September
30, 1999 reflect amounts as of and for the periods ended September 29, 2000,
March 31, 2000 and October 1, 1999, respectively. The three months ended
September 30, 2000 and 1999 comprised 13 weeks of activity. The six months ended
September 30, 2000 and 1999 comprised 26 weeks of activity.
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. BALANCE SHEET INFORMATION
September 30, March 31,
(In thousands) 2000 2000
------------- ---------
(unaudited)
Cash, cash equivalents and short-term investments:
Cash $ 52,794 $ 60,103
Cash equivalents 24,732 43,897
Short-term investments 430,303 327,550
--------- ---------
$ 507,829 $ 431,550
========= =========
Trade accounts receivable:
Receivables $ 98,880 $ 53,710
Less: allowance for doubtful accounts (6,281) (6,444)
--------- ---------
$ 92,599 $ 47,266
========= =========
Inventories:
Raw materials $ 616 $ 2,483
Finished goods 2,279 3,192
--------- ---------
$ 2,895 $ 5,675
========= =========
Equipment and leasehold improvements:
Computer hardware and software $ 154,580 $ 142,290
Office furniture and equipment 39,212 39,330
Leasehold improvements 21,703 19,585
--------- ---------
215,495 201,205
Less: accumulated depreciation and amortization (154,297) (149,300)
--------- ---------
$ 61,198 $ 51,905
========= =========
Acquired product rights:
Acquired product rights $ 49,059 $ 54,592
Less: accumulated amortization (20,066) (20,522)
--------- ---------
$ 28,993 $ 34,070
========= =========
Goodwill:
Goodwill $ 107,555 $ 107,032
Less: accumulated amortization (34,437) (24,060)
--------- ---------
$ 73,118 $ 82,972
========= =========
Accumulated other comprehensive loss:
Unrealized loss on available-for-sale investments $ (8,365) $ (2,373)
Cumulative translation adjustment (39,590) (25,334)
--------- ---------
$ (47,955) $ (27,707)
========= =========
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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) 2000 1999 2000 1999
------- ------- ------- -------
BASIC NET INCOME PER SHARE
Net income $39,113 $25,832 $77,510 $49,559
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period 61,011 57,034 60,754 56,697
======= ======= ======= =======
Basic net income per share $ 0.64 $ 0.45 $ 1.28 $ 0.87
======= ======= ======= =======
DILUTED NET INCOME PER SHARE
Net income $39,113 $25,832 $77,510 $49,559
======= ======= ======= =======
Weighted average number of common
shares outstanding during the period 61,011 57,034 60,754 56,697
Shares issuable from assumed exercise
of options 2,937 3,361 3,340 2,636
------- ------- ------- -------
Total shares for purpose of calculating
diluted net income per share 63,948 60,395 64,094 59,333
======= ======= ======= =======
Diluted net income per share $ 0.61 $ 0.43 $ 1.21 $ 0.84
======= ======= ======= =======
For the three months ended September 30, 2000, and the six months ended
September 30, 2000, shares issuable from assumed exercise of options exclude
approximately 3,674,000 and 2,280,000 options respectively, as their effect on
diluted net income per share would have been anti-dilutive. For the three months
ended September 30, 1999, and the six months ended September 30, 1999, shares
issuable from assumed exercise of options exclude approximately 49,000 and
1,318,000 options respectively, as their effect on diluted net income per share
would have been anti-dilutive.
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 4. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- ----------------------
(In thousands; unaudited) 2000 1999 2000 1999
-------- -------- -------- -------
Net income $ 39,113 $ 25,832 $ 77,510 $49,559
Other comprehensive (loss) income:
Change in unrealized (loss) gain on
available-for-sale investments,
net of a tax (benefit) provision of ($50),
($3), ($2,819) and $68 (108) (7) (5,992) 163
Change in cumulative translation adjustment,
net of a tax provision (benefit) of ($5,739),
$1,644, ($6,709), and $1,589 (12,194) 3,494 (14,256) 3,376
-------- -------- -------- -------
Total other comprehensive (loss) income (12,302) 3,487 (20,248) 3,539
-------- -------- -------- -------
Comprehensive income $ 26,811 $ 29,319 $ 57,262 $53,098
======== ======== ======== =======
NOTE 5. LITIGATION AND CONTINGENCIES
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. For further information on these cases
refer to the Company's previously filed Annual Report on Form 10-K for the year
ended March 31, 2000.
NOTE 6. RESTRUCTURING AND OTHER EXPENSES
During the March 2000 quarter, Symantec reduced operations in its Melville and
Toronto sites, thereby reducing its workforce by 96 employees. Each of these
employees either received a separation package or accepted offers to move to
other Symantec offices. As a result, the facility in Melville was vacated and
the Company is reducing the space occupied in Toronto. The Company recorded
approximately $3.4 million for employee severance, outplacement and abandonment
of certain facilities and equipment during the March 2000 quarter. In addition,
approximately $0.7 million was provided for costs of severance, related benefits
and outplacement services for two
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
members of senior management due to the realignment of Symantec's business units
and their resulting departures during the March 2000 quarter.
During the December 1999 quarter, management reduced its Internet Tools business
unit's workforce and reduced its Sales workforce. There were 48 employees in the
Internet Tools business unit affected, resulting in approximately $1.8 million
of severance, related benefits and outplacement services being accrued during
the December 1999 quarter. The Sales workforce reduction affected 10 employees,
resulting in approximately $0.4 million of severance, related benefits and
outplacement services being accrued in the December 1999 quarter.
During the September 1999 quarter, Symantec provided approximately $0.7 million
for costs of severance, related benefits and outplacement services for two
members of senior management due to the realignment of its business units and
their resulting departures. The Company also accrued approximately $2.7 million
for certain costs related to an agreement reached with its former CEO in the
June 1999 quarter. These costs were comprised of severance and acceleration of
unvested stock options.
As of the September 2000 quarter, approximately $8.2 million has been paid for
employee severance and outplacement and approximately $0.5 million has been paid
for excess facilities and equipment.
Details of the fiscal 2000 restructuring charges are as follows:
Cash/ Original Amount Amount Balance
(In thousands) Non-cash Charge Paid Adjusted at 9/30/00
-------------- -------- --------- -------- ----------
Employee severance and outplacement Cash & Non-cash $8,733 $(8,224) $-- $ 509
Excess facilities and equipment Cash & Non-cash 953 (445) -- 508
------ ------- --- ------
Total restructuring and other expenses $9,686 $(8,669) $-- $1,017
====== ======= === ======
During the September 1998 quarter, Symantec made a decision to restructure its
operations and outsource domestic manufacturing operations. As a result,
management originally 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. These estimates were subsequently revised in the
September 1999 quarter, resulting in a reduction in the accruals by
approximately $0.7 million. As of the September 2000 quarter, approximately $4.3
million has been paid.
Details of the fiscal 1999 restructuring charges are as follows:
Cash/ Original Amount Amount Balance
(In thousands) Non-cash Charge Paid Adjusted at 9/30/00
-------------- -------- --------- -------- ----------
Employee severance and outplacement Cash $3,800 $(3,800) $ -- $ --
Excess facilities and equipment Cash & Non-cash 1,305 (527) (668) 110
------ ------- ----- ----
Total restructuring and other expenses $5,105 $(4,327) $(668) $110
====== ======= ===== ====
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 7. ACQUISITION OF 20/20 SOFTWARE
On March 31, 2000, Symantec purchased 100% of the outstanding common stock of
20/20 software ("20/20") for up to $16.5 million. The terms of the agreement
require two guaranteed payments totaling approximately $7.5 million plus
contingent payments based on targeted future sales of certain of our products.
The contingency period is from July 1, 2000 to June 30, 2001. The maximum
contingency payment per the agreement is $9.0 million. The transaction was
accounted for as a purchase. In connection with the transaction, the Company
originally recorded approximately $6.1 million for goodwill and $2.3 million for
acquired product rights, offset by $0.9 million in related income tax
liabilities. In the September 2000 quarter, an additional amount of
approximately $0.5 million was paid under this agreement which was recorded as
additional goodwill. As the Company continues to make payments under the
agreement over the contingency period, additional goodwill will be recorded
equal to these payments. The goodwill and acquired product rights will be
amortized over a five-year period.
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 for
up to $20.00 per share. As of September 30, 2000, the Company has repurchased
1,000,000 shares at prices ranging from $17.90 to $19.90, for an aggregate
amount of $18.7 million. All of these shares were purchased in the June 1999
quarter.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. 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 the Company at the beginning of the June 2001 quarter for both
annual and interim reporting periods. The Company is currently evaluating the
potential impact of this accounting pronouncement on its required disclosures
and accounting practices.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition in Financial Statements. In June 2000, the SEC released SAB
No. 101B, which defers reporting the effects of the adoption of SAB No. 101
until our fourth fiscal quarter of fiscal 2001. The Company is currently
evaluating the potential impact of SAB No. 101 on its required disclosures and
accounting practices.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB Opinion No.
25. This Interpretation clarifies the application of Opinion No. 25 for certain
issues including: (a) the definition of an employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award and (d) the accounting for
an exchange of stock compensation awards in a business combination. Management
has adopted this Interpretation. As a result, the adoption of the Interpretation
did not have a material effect on the Company's consolidated financial position
or results of operations.
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 10. SEGMENT INFORMATION
Symantec's operating segments are significant strategic business units that
offer different products and services, distinguished by customer needs. The
Company has five operating segments: Consumer and Small Business, Enterprise
Solutions, e-Support, Professional Services and Other.
The Consumer and Small Business segment focuses on delivering security and
problem-solving products to individual users and small companies. The Enterprise
Solutions segment focuses on delivering more complex and specialized products to
meet the needs of organizations' networks and support for their large workforce
throughout the organization. The e-Support segment focuses on helping IT
departments be more effective and efficient through remote management solutions.
The Professional Services segment is focused on providing technical support to
our customers and assisting organizations to understand and implement Internet
security infrastructure and policy management. The Other segment is comprised of
sunset products, products nearing the end of their life cycle, and operations
from our divested product lines ACT! and Visual Cafe. Also included in the Other
segment are all indirect costs, general and administrative expenses and charges
that are one-time in nature, such as acquired in-process research and
development and restructuring and other expenses which are not charged to the
other operating segments.
The following table summarizes each segment's net revenues from external
customers and operating income (loss):
Consumer
and Small Enterprise Professional Total
(In thousands) Business Solutions e-Support Services Other Company
--------- ---------- --------- ------------ -------- --------
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Revenue from
external customers $80,012 $45,830 $56,725 $ 9,006 $ 723 $192,296
Operating income (loss) 49,223 16,667 52,698 3,387 (75,552) 46,423
Depreciation &
amortization expense 3,050 1,747 2,162 343 28 7,330
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue from
external customers 66,539 37,148 61,302 3,988 13,558 182,535
Operating income (loss) 25,973 18,156 53,595 (1,568) (64,108) 32,048
Depreciation &
amortization expense 2,604 1,453 2,398 156 530 7,141
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Consumer
and Small Enterprise Professional Total
(In thousands) Business Solutions e-Support Services Other Company
--------- ---------- --------- ------------ -------- --------
SIX MONTHS ENDED
SEPTEMBER 30, 2000
Revenue from
external customers 155,883 94,104 115,280 16,972 1,415 383,654
Operating income (loss) 91,769 34,842 108,368 6,098 (149,333) 91,744
Depreciation &
amortization expense 5,994 3,618 4,433 653 54 14,752
SIX MONTHS ENDED
SEPTEMBER 30, 1999
Revenue from
external customers 141,852 73,013 109,495 7,189 26,124 357,673
Operating income (loss) 62,123 35,767 92,632 (3,028) (127,700) 59,794
Depreciation &
amortization expense 5,070 2,627 3,976 261 942 12,876
GEOGRAPHICAL INFORMATION
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- --------------------
(In thousands) 2000 1999 2000 1999
-------- --------- -------- --------
Net revenues from external customers:
United States $100,605 $100,378 $202,026 $200,147
Foreign countries 91,691 82,157 181,628 157,526
-------- --------- -------- --------
$192,296 $182,535 $383,654 $357,673
======== ======== ======== ========
NOTE 11. AXENT ACQUISITION
On July 26, 2000, the Company signed an agreement to acquire 100% of the
outstanding shares of AXENT Technologies, Inc ("AXENT"). Upon obtaining
necessary regulatory and stockholder approvals, the Company plans to exchange
one share of Symantec common stock for every two shares of AXENT outstanding
common stock. The Company expects to issue approximately 15.3 million shares in
the transaction. The Hart-Scott-Rodino Act waiting period expired on
September 4, 2000. A Form S-4 related to the AXENT acquisition was filed with
the Securities and Exchange Commission on September 20, 2000. Amendment No. 1
to the Form S-4 was filed on November 3, 2000. The shareholders of Symantec
and AXENT will meet separately on December 15, 2000 to vote on the merger and,
if approved, it is contemplated that the merger will be consummated promptly
thereafter.
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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 INCREASED SALES OF ENTERPRISE-WIDE SITE LICENSES MAY INCREASE FLUCTUATIONS
IN OUR FINANCIAL RESULTS. Sales of enterprise-wide site licenses through our
Enterprise Solutions segment are a major portion of our business. This
enterprise market has significantly different characteristics than the consumer
market and requires different skills and resources to penetrate. 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.
WE RECENTLY RESTRUCTURED OUR INTERNAL FOCUS AND OPERATIONS AND WE COULD INCUR
ADVERSE OPERATING CONSEQUENCES AS A RESULT OF THESE CHANGES. In fiscal 2000, we
restructured our operations on the basis of a customer segment orientation
rather than a product oriented structure. We also divested two product lines
that did not fit with our future focus. Changes of this nature inevitably cause
disruptions within an organization that may adversely affect results as the
changes are being absorbed, and these changes may not achieve their desired
long-term benefits. Overseeing these changes requires significant attention from
our senior management and may detract from senior management's ability to focus
on other important opportunities or problems that might confront us. We have
lost personnel, including management, and we may continue to do so as a
consequence of these and similar changes. In addition, we may not be able to
introduce new products that are as beneficial to us as those that we divested.
WE HAVE GROWN, AND MAY CONTINUE TO GROW, THROUGH ACQUISITIONS, WHICH GIVE RISE
TO A NUMBER OF RISKS THAT COULD HAVE ADVERSE CONSEQUENCES FOR OUR FUTURE
OPERATING RESULTS. We have made seven acquisitions within the last two fiscal
years and have recently announced our agreement to acquire AXENT Technologies,
Inc., which we expect to complete in our third quarter of fiscal 2001. The
agreement is subject to typical closing conditions. If these conditions are not
satisfied, the acquisition may not be consummated. We may also complete material
acquisitions in the future. Integrating acquired businesses into our existing
business may distract our management focus from other opportunities and
challenges. Our past acquisitions have given rise to, and future acquisitions
may result in, substantial levels of goodwill and other intangible assets that
will be amortized in future years and our future operating results will be
adversely affected if we do not achieve benefits from these acquisitions
commensurate with these charges. In addition, a number of our recent
acquisitions have resulted in our incurring substantial write-offs of acquired
in-process research and development costs and this also may occur as a result of
future acquisitions. We may issue equity, or incur debt financing, for future
acquisitions that are dilutive to our existing stockholders.
INTEGRATION OF AXENT TECHNOLOGIES, INC. MAY BE DIFFICULT TO ACHIEVE, WHICH MAY
ADVERSELY AFFECT OPERATIONS. Our merger with AXENT involves risks related to the
integration and management of acquired technology, operations and personnel. The
integration of AXENT with our business will be a complex, time-consuming and
14
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
expensive process and may disrupt our business if not completed in a timely and
efficient manner. Following the merger, we must operate as a combined
organization utilizing common information and communications systems, operating
procedures, financial controls and human resources practices.
We may both encounter substantial difficulties, costs and delays involved in
integrating our operations, including:
- potential conflicts between business cultures;
- perceived adverse changes in business focus;
- potential conflicts in distribution, marketing or other important
relationships; and
- the loss of key employees and/or the diversion of management's
attention from other ongoing business concerns.
IF WE DO NOT SUCCESSFULLY INTEGRATE AXENT, OR IF THE MERGER'S BENEFITS DO NOT
MEET THE EXPECTATIONS OF FINANCIAL OR INDUSTRY ANALYSTS, THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE.
The market price of our common stock could decline if:
- the integration of AXENT is unsuccessful;
- we are unable to successfully market our products and services to
AXENT's customers or AXENT's products and services to our customers;
- we do not achieve the perceived benefits of the merger as rapidly as,
or to the extent, anticipated by financial or industry analysts, or
such analysts do not perceive the same benefits to the merger as both
AXENT and we do; or
- the effect of the merger on our financial results is not consistent
with the expectations of financial or industry analysts.
THE COSTS TO COMPLETE OUR MERGER WITH AXENT ARE SUBSTANTIAL. THESE COSTS AND THE
MANNER OF ACCOUNTING FOR THE MERGER MAY AFFECT OUR RESULTS OF OPERATIONS.
Completion of the merger will result in costs relating to combining the
businesses of the two companies and the fees of financial advisors, attorneys,
consultants and accountants. In addition, we will also incur costs upon
completion of the merger, or shortly thereafter, related to consolidation of
sites and severance paid to certain employees as a result of this
consolidation. The extent of these costs is not yet determined. In any event,
any costs associated with the merger would negatively affect our results of
operations in the quarter in which the merger is completed or future quarters
as some additional costs would result in additional quarterly amortization.
In the quarter in which the merger is completed, we expect to incur a one-time
accounting charge of approximately $22 million related to AXENT's in-process
research and development expenses. This charge is likely to considerably reduce
our earnings in that quarter. Furthermore, if the merger is completed, we will
amortize over four years approximately $750 million in value of the tradename,
workforce-in-place, goodwill, developed technology and other intangible AXENT
assets that we will capitalize on our balance sheet as a result of the merger.
This amortization will reduce our earnings over that period. In addition,
AXENT's historical operating results have been considerably less profitable than
ours, which may adversely affect our combined operating results in the future.
Our future operating results will be adversely affected if we do not achieve
benefits from this merger commensurate with these charges.
OUR SOFTWARE PRODUCTS AND WEB SITE MAY BE SUBJECT TO INTENTIONAL DISRUPTION.
Although we believe we have sufficient controls in place to prevent intentional
disruptions, such as software viruses specifically designed to impede the
performance of our products, we expect to be an ongoing target of such
disruptions. Similarly,
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16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
experienced computer programmers, or hackers, may attempt to penetrate our
network security or the security of our web site and misappropriate proprietary
information or cause interruptions of our services. Our activities could be
substantially disrupted and our reputation, and future sales, harmed if these
efforts are successful.
OUR MARKETS ARE HIGHLY COMPETITIVE AND OUR OPERATING RESULTS AND FINANCIAL
CONDITION COULD BE ADVERSELY AFFECTED BY THIS COMPETITION. Our markets are
intensely competitive. This competition could adversely affect our operating
results by reducing our sales or the prices we can charge for our products. Our
ability to remain competitive depends, in part, on our ability to enhance our
products or develop new products that are compatible with new hardware and
operating systems. We have no control over, and limited insight into,
development efforts by third parties with respect to new hardware and operating
systems and we may not be able to respond effectively or timely to such changes
in the market. In addition, we have limited resources and we must make strategic
decisions as to the best allocation of our resources to position ourselves for
changes in our markets. We may from time to time allocate resources to projects
or markets that do not develop as rapidly or fully as we expect. We may fail to
allocate resources to third party products or to markets that are more
successful than we anticipate.
INTRODUCTION OF NEW OPERATING SYSTEMS MAY ADVERSELY AFFECT OUR FINANCIAL RESULTS
AND STOCK PRICE. The inclusion of security or anti-virus tools in new operating
systems and hardware packages could adversely affect our sales. For example, the
inclusion of features by Microsoft in new or upcoming versions of Windows, such
as current and future editions of Windows 2000, 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 six months after the releases of Windows 3.1,
Windows 95 and Windows 98. The consumer/desktop oriented Windows Millennium
Edition, the successor to Windows 98, was released in the September 2000
quarter, and, as a result, we could face adverse financial results and
additional stock price declines. 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.
With the rise of Linux-based operating systems, we may lose market share if we
are unable to significantly penetrate the Linux-based market in a timely and
effective manner.
OUR EARNINGS AND STOCK PRICE ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. Due to
many factors, including those noted in this section, our earnings and stock
price have been and may continue to be subject to significant volatility. 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.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS HAVE AFFECTED OUR STOCK PRICE IN
THE PAST AND COULD AFFECT OUR STOCK PRICE IN THE FUTURE. If our quarterly
operating results fail to meet the expectations of analysts, the trading price
of shares of our common stock could be negatively affected. Our quarterly
operating results have varied substantially in the past and may vary
substantially in the future depending upon a number of factors, including:
- the timing of announcements and releases of new or enhanced versions
of our products and product upgrades;
- the introduction of competitive products by existing or new
competitors;
- reduced demand for any given product;
- seasonality in the end-of-period buying patterns of foreign and
domestic software markets; and
- the market's transition between new releases of operating systems.
In addition to the foregoing factors, the risk of quarterly fluctuations is
increased by the fact that a significant portion of our net revenues have
historically been generated during the last month of each fiscal quarter. Most
resellers tend to make a majority of their purchases at the end of a fiscal
quarter. In addition, many enterprise customers negotiate site licenses near the
end of each quarter. In part, this is because these two groups are able, or
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17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
believe that they are able, to negotiate lower prices and more favorable terms
at that time. Our reliance on a large portion 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.
WE FACE RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS. A significant portion of
our net revenues, manufacturing costs and operating expenses result from
transactions outside of the United States, often in foreign currencies. During
the September 2000 quarter, fluctuations in foreign currency significantly and
adversely affected our operating results. Our future operating results could be
materially and adversely affected by fluctuations in currency exchange rates and
general uncertainty with each country's political and economic structure.
WE MUST EFFECTIVELY ADAPT TO CHANGES IN A DYNAMIC TECHNOLOGICAL ENVIRONMENT. We
are increasingly focused on the Internet security market, which, in turn is
dependent on further acceptance of the Internet. The following critical issues
concerning the use of the Internet remain unresolved and may affect the market
for our products and the use of the Internet as a medium to distribute or
support our software products and the functionality of some of our products:
- security;
- reliability;
- cost;
- ease of use;
- accessibility;
- quality of service; and
- potential tax or other government regulations.
In addition, new technologies, such as non PC-based Internet access devices and
handheld organizers are gaining acceptance. We must adapt to these changing
technological demands. If we are unable to timely assimilate changes brought
about by the Internet and non PC-based environments, our future net revenues and
operating results could be adversely affected.
THE RESULTS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE UNCERTAIN. We believe
that we will need to incur significant research and development expenditures to
remain competitive. The products we are currently developing or may develop in
the future may not be technologically successful. In addition, 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. If
they are not technologically successful, our resulting products may not achieve
market acceptance or compete effectively with products of our competitors.
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18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
WE ARE DEPENDENT UPON CERTAIN DISTRIBUTION CHANNELS. A large portion of our
sales is made through the retail distribution channel, which is subject to
events that create unpredictability in consumer demand. This increases the risk
that we may not plan effectively for the future, which could result in adverse
operating results in future periods. 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 our
competitors and other factors that we do not control nor can we predict. Our
agreements with retail distributors are generally nonexclusive and may be
terminated by them or by us without cause. We would be adversely affected if
companies in our chain of distributors chose to increase purchases from our
competition relative to the amount they buy from us.
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. If these distributors do
experience financial difficulties and we are unable to move their inventories to
other distributors, we may experience reduced sales or increased write-offs,
which would adversely affect our operating results.
WE MAY BE UNSUCCESSFUL IN UTILIZING NEW DISTRIBUTION CHANNELS. We currently
offer a broad range of products and services over the Internet, which is a
relatively new distribution channel for our business. We may not be able to
effectively adapt our existing, or adopt new, methods of distributing our
software products utilizing the rapidly evolving Internet and related
technologies. The adoption of new channels may adversely impact existing
channels and/or product pricing, which may reduce our future revenues and
profitability.
CHANNEL FILL AND PRODUCT RETURNS MAY NEGATIVELY AFFECT OUR NET REVENUES. Our
pattern of net revenues and earnings may be affected by "channel fill."
Distributors may fill their distribution channels in anticipation of price
increases, sales promotions or incentives. Channels may also become filled
simply because the distributors do not sell their inventories to retail
distribution or from 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 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,
subject to limitations, 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 DEPEND ON INTERNAL COMMUNICATIONS SYSTEMS THAT MAY BE DISRUPTED. Our order
entry and product shipping centers are geographically dispersed. A business
disruption could occur as a result of natural disasters or the interruption in
service by communications carriers. If our communications between these centers
are disrupted, particularly at the end of a fiscal quarter, we may 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.
WE EXPECT TO MAKE SUBSTANTIAL CHANGES TO OUR INFORMATION SYSTEMS THAT COULD
DISRUPT OUR BUSINESS. The information systems that support our accounting,
finance and manufacturing systems are based on Oracle 10.7, and many of the
business applications used in other aspects of our business have been tightly
coupled with Oracle 10.7. Oracle has released a new version, 11i, and has
announced that support for 10.7 will be discontinued at the end of 2001. In
addition, as our business has grown, we have developed needs for an increasing
robust customer relationship management ("CRM") system. Over the next 18 months,
we will be transitioning to Oracle 11i and a new CRM system. Failure to manage a
smooth transition to the new systems could result in a material adverse effect
on our business operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
WE ARE SUBJECT TO LITIGATION THAT COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.
From time to time, we may be subject to claims that we have infringed the
intellectual property rights of others, or other product liability claims, or
other claims incidental to our business. We are currently involved in a number
of lawsuits. For a discussion of material changes and events related to our
current litigation, see Note 5 of Notes to Condensed Consolidated Financial
Statements of this Form 10-Q and our previously filed Form 10-K for the year
ended March 31, 2000. We intend to defend all of these lawsuits vigorously.
However, it is possible that we could suffer an unfavorable outcome in one or
more of these cases. Depending on the amount and timing of any unfavorable
resolutions of these lawsuits, our future results of operations or cash flows
could be materially adversely affected in a particular period.
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 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.
THE TREND TOWARD CONSOLIDATION IN THE SOFTWARE INDUSTRY COULD IMPEDE OUR ABILITY
TO COMPETE EFFECTIVELY. Consolidation is underway among companies in the
software industry as firms seek to offer more extensive suites of software
products and broader arrays of software solutions. Changes resulting from this
consolidation may negatively impact our competitive condition. In addition, to
the extent that we seek to expand our product lines, and skills and capacity
through acquisitions, the trend toward consolidation may result in our
encountering competition, and paying higher prices, for acquired businesses.
WE MUST ATTRACT AND RETAIN PERSONNEL WHILE COMPETITION FOR PERSONNEL IN OUR
INDUSTRY IS INTENSE. We believe that our future success will depend in part on
our ability to recruit and retain highly skilled management, marketing and
technical personnel. Competition in recruiting personnel in the software
industry is intense. To accomplish this, we believe that we must provide
personnel with a competitive compensation package, including stock options,
which requires ongoing stockholder approval. Such approval may not be
forthcoming and, as a result, we may be impaired in our efforts to attract
necessary personnel.
OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS MAY NOT BE ADEQUATELY PROTECTED
FROM ALL UNAUTHORIZED USES. We regard our software 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. 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 laws, 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, and we
may be subject to unauthorized use of our products. Any legal action that we may
bring to protect proprietary information could be expensive and may distract
management from day-to-day operations.
OUR PRODUCTS ARE COMPLEX AND ARE OPERATED IN A WIDE VARIETY OF COMPUTER
CONFIGURATIONS, WHICH COULD RESULT IN ERRORS OR PRODUCTS FAILURES. Because we
offer very complex products, undetected errors, failures or bugs may occur when
they are first introduced or when new versions are released. Our products often
are installed and used in large-scale computing environments with different
operating systems, system management software and equipment and networking
configurations, which may cause errors or failures in our products or may
disclose undetected errors, failures or bugs in our products. In the past, we
have discovered software errors, failures and bugs in certain of our product
offerings after their introduction and have experienced delays or lost revenues
during the period required to correct these errors. Our customers' computer
environments are often characterized by a
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
wide variety of standard and non-standard configurations that make pre-release
testing for programming or compatibility errors very difficult and
time-consuming. Despite testing by us and by others, errors, failures or bugs
may not be found in new products or releases after commencement of commercial
shipments. Errors, failures or bugs in products released by us could result in
negative publicity, product returns, loss of or delay in market acceptance of
our products or claims by customers or others. Alleviating such problems could
require significant expenditures of our capital and resources and could cause
interruptions, delays or cessation of our product licensing, which would
adversely affect results of operations.
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.
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. Further, customer demand for these services could cause
increases in the costs of providing such services and adversely affect our
operating results.
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21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
OVERVIEW
Symantec, a world leader in Internet security technology, provides a broad range
of content and network security solutions to individuals and enterprises. As a
leader in Internet security, we offer a breadth of solutions including virus
protection, risk management, Internet content and e-mail filtering, remote
management and mobile code detection technologies to enterprises and individual
customers. Founded in 1982, we have offices in 34 countries worldwide. The
September 30, 2000 and 1999 quarters closed on September 29, 2000 and October 1,
1999, respectively, and each comprised 13 weeks of revenue and expense activity.
Each of the six month periods ended September 30, 2000 and 1999 comprised 26
weeks of revenue and expense activity.
RESULTS OF OPERATIONS
The following table sets forth each item from our consolidated statements of
income as a percentage of net revenues and the percentage change in the total
amount of each item for the periods indicated:
Three Months Percent Six Months Percent
Ended Change Ended Change
September 30, in Dollar September 30, in Dollar
2000 1999 Amounts 2000 1999 Amounts
---- ---- --------- ---- ---- ---------
(Unaudited)
Net revenues ............................... 100% 100% 5% 100% 100% 7%
Cost of revenues ........................... 14 17 (13) 14 17 (11)
--- --- ---- --- --- ----
Gross margin ........................ 86 83 9 86 83 11
Operating expenses:
Research and development .............. 15 15 5 14 15 (1)
Sales and marketing ................... 39 42 (1) 40 42 2
General and administrative ............ 5 5 (3) 5 5 5
Amortization of goodwill .............. 3 3 1 3 3 14
Amortization of other intangibles ..... -- -- 23 -- -- *
Acquired in-process research and
development ....................... -- 1 (100) -- -- *
Restructuring and other expense ....... -- -- * -- 1 *
--- --- ---- --- --- ----
Total operating expenses ............ 62 66 (1) 62 66 1
--- --- ---- --- --- ----
Operating income ........................... 24 17 45 24 17 53
Interest income ............................ 4 1 222 4 1 214
Income, net of expense, from sale of
technologies and product lines .... 3 3 5 3 3 13
Other (expense) income, net ................ -- -- * -- -- *
--- --- ---- --- --- ----
Income before income taxes ................ 31 21 52 31 21 58
Provision for income taxes ................. 11 7 52 10 7 60
--- --- ---- --- --- ----
Net income ................................. 20% 14% 51 21% 14% 56
=== === ==== === === ====
* percentage change is not meaningful.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
NET REVENUES
Net revenues increased 5% to $192.3 million in the September 2000 quarter from
$182.5 million in the September 1999 quarter. Revenue growth in the September
2000 quarter compared to the September 1999 quarter was attributable to growth
in our Consumer and Small Business and Enterprise Solutions segments, partially
offset by a decline in our e-Support and Other segments' revenues. The revenue
increase in the Consumer and Small Business and Enterprise Solutions segments
was due to strong growth in our anti-virus solutions. The revenue decline in our
e-Support segment was due primarily to weakness in demand for our pcANYWHERE
product line. The revenue decline in our Other segment was due primarily to our
divestiture of our ACT! and Visual Cafe product lines in the December 1999
quarter, which revenues are included in the September 1999 quarter.
Net revenues increased 7% to $383.7 million in the six month period ended
September 30, 2000 from $357.7 million in the comparable period ended September
30, 1999. The increase in total revenue was due to growth in all of the segments
except for the Other segment.
INTERNATIONAL
Net revenues from sales outside of North America were $84.2 million and
$74.9 million and represented 44% and 41% of total net revenues in the quarters
ended September 30, 2000 and 1999, respectively. Net revenues from international
sales outside of North America were $167.9 million and $142.8 million and
represented 44% and 40% of total net revenues in the six month periods ended
September 30, 2000 and 1999, respectively. International net revenues in the
three and six month periods ended September 30, 2000 were negatively impacted by
the strength of the U.S. dollar which resulted in a $6.5 million and $8.9
million revenue decline, respectively, as compared to the functional rates in
effect during the three and six month periods ended September 30, 1999. There
are no assurances that there will not be a continued decline due to the weakness
of foreign currencies.
SEGMENTS
The Consumer and Small Business segment provides security and problem-solving
products to individual consumers, home offices and small businesses. The
segment's charter is to ensure that consumers and their information are secure
and protected in a connected world. The Consumer and Small Business segment
comprised approximately 42% and 37% of net revenues in the quarters ended
September 30, 2000 and 1999, respectively. The Consumer and Small Business
segment comprised approximately 41% and 40% of net revenues in the six month
periods ended September 30, 2000 and 1999, respectively. Increased net revenues
for this segment in both the three and six month periods ended September 30,
2000, compared to the three and six month periods ended September 30, 1999, were
primarily related to strong growth with our anti-virus and suite solutions.
The Enterprise Solutions segment provides a broad range of security solutions
for our enterprise customers. Our enterprise customers need to protect their
businesses from the threats associated with the use of the Internet. The
Enterprise Solutions segment comprised approximately 24% and 20% of net revenues
in the quarters ended September 30, 2000 and 1999, respectively. The Enterprise
Solutions segment comprised approximately 25% and 20% of net revenues in the six
month periods ended September 30, 2000 and 1999, respectively. Increased net
revenues for this segment in both the three and six month periods ended
September 30, 2000, compared to the three and six month periods ended September
30, 1999, were primarily related to strong growth in our corporate anti-virus
and desktop firewall solutions.
The e-Support segment offers products that enable companies to be more effective
and efficient within their IT departments. Remote management solutions help
remote professionals to remain productive while providing companies access to
information, applications and data from any location. The e-Support segment
comprised approximately 29% and 34% of net revenues in the quarters ended
September 30, 2000 and 1999, respectively. The e-Support segment comprised
approximately 30% and 31% of net revenues in the six month periods ended
September 30, 2000 and 1999, respectively. The segment's net revenues were lower
in the quarter ended September 30, 2000 over the quarter ended
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
September 30, 1999, due to a decline in sales of our pcANYWHERE product,
partially offset by growth of our Ghost product. The segment's net revenues
remained relatively flat for the six month period ended September 30, 2000
compared to the six month period ended September 30, 1999.
The Professional Services segment provides fee-based technical support and
consulting services to enterprise customers to assist them with the planning,
design and implementation of enterprise security solutions in the anti-virus and
Internet content filtering technologies. The Professional Services segment
comprised approximately 5% and 2% of net revenues for the quarters ended
September 30, 2000 and 1999, respectively. The Professional Services segment
comprised approximately 4% and 2% of net revenues in the six month periods ended
September 30, 2000 and 1999, respectively. Increased net revenues for this
segment in both the three and six month periods ended September 30, 2000,
compared to the three and six month periods ended September 30, 1999, were
primarily related to growth in demand for product technical support.
The Other segment is comprised of sunset products, products nearing the end of
their life cycle, and operations of our ACT! and Visual Cafe product lines that
we divested in the December 1999 quarter. The Other segment comprised
approximately 0% and 7% of net revenues in the quarters ended September 30, 2000
and 1999, respectively, as well as in the six month periods ended September 30,
2000 and 1999, respectively. The segment's net revenues were lower in the three
and six months ended September 30, 2000 over the three and six months ended
September 30, 1999, due to our divestiture of the ACT! and Visual Cafe product
lines in the December 1999 quarter, which revenues had been included in the
fiscal 2000 periods.
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, or acquired product rights.
Gross margin increased to 86% of net revenues in both the September 2000 quarter
and the six month period ending September 30, 2000 from 83% in the September
1999 quarter and the six month period ended September 30, 1999. Factors
contributing to the increase in gross margin percentage include substantial cost
savings achieved in reduced packaging costs and standardized packaging.
Amortization and write-off of acquired product rights totaled approximately $2.6
million and $2.2 million for the September 2000 and 1999 quarters, respectively.
Amortization and write-off of acquired product rights totaled approximately $5.1
million and $4.2 million for the six month periods ended September 2000 and
1999, respectively. The increase is due to our acquisitions in fiscal 2000.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 5% from approximately $27.3 million
in the September 1999 quarter to $28.7 million in the September 2000 quarter
primarily due to an increase in headcount related to the Enterprise Solutions
segment. This increase was partially offset by reduced expenses associated with
the divested ACT! and Visual Cafe product lines. Research and development
expenses decreased 1% from approximately $54.9 million for the six months ending
September 1999 to $54.5 million for the six months ending September 2000
primarily due to a drop in headcount following our divestiture of ACT! and
Visual Cafe in the December 1999 quarter.
SALES AND MARKETING EXPENSES
Sales and marketing expenses decreased 1% from approximately $75.9 million in
the September 1999 quarter to $75.4 million in the September 2000 quarter. Sales
and marketing expenses decreased slightly due to reduced expenses associated
with the divested ACT! and Visual Cafe product lines, which was partially offset
by increased sales force headcount in the Enterprise Solutions segment. Sales
and marketing expenses increased 2% from
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
approximately $149.4 million for the six months ending September 1999 to $152.4
million for the six months ending September 2000. This increase is primarily due
to growth in headcount in our Professional Services segment, and related
expenses in the June 2000 quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses remained flat at 5% of net revenues in both
the three month periods ended September 2000 and 1999, and in both the six month
periods ended September 2000 and 1999.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased approximately $0.1
million from $5.4 million in the September 1999 quarter to $5.5 million in the
September 2000 quarter. Amortization of goodwill and other intangibles increased
approximately $1.4 million from $9.5 million in the six months ending September
1999 to $10.9 million for the six months ending September 2000. The increase is
due to amortization of additional goodwill and other intangibles from
acquisitions we made in the last half of fiscal 2000.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
Acquired in-process research and development was $1.2 million in both the three
and six month periods ending September 30, 1999, due to our acquisition of
URLabs, Inc. There were no acquired in-process research and development expenses
in fiscal 2001.
RESTRUCTURING AND OTHER EXPENSES
Restructuring and other expenses amounted to approximately $2.8 million for the
six months ended September 30, 1999, for certain costs related to an agreement
reached with our former CEO. These costs were comprised of severance and
acceleration of unvested stock options. There were no restructuring and other
expenses in the six months ended September 30, 2000. See Note 6 of Notes to
Condensed Consolidated Financial Statements in this Form 10-Q.
INTEREST AND OTHER INCOME
Interest income was approximately $8.0 million and $2.5 million in the quarters
ended September 30, 2000 and 1999, respectively. Interest income increased 222%
in the quarter ended September 30, 2000 over the quarter ended September 30,
1999, primarily due to higher invested cash balances and higher average interest
rates for the September 2000 quarter compared to the September 1999 quarter.
Interest income was approximately $14.7 million and $4.7 million in the six
months ended September 30, 2000 and 1999, respectively. Interest income
increased 214% in the six months ended September 30, 2000 over the six months
ended September 30, 1999, primarily due to higher average invested cash balances
and higher average interest rates.
Other income (expense) was relatively flat at approximately ($0.3) million and
($0.4) million in the quarters ended September 30, 2000 and 1999, respectively.
Other income was relatively flat at less than $0.1 million and approximately
$0.2 million in the six months ended September 30, 2000 and 1999, respectively.
INCOME, NET OF EXPENSE, FROM SALE OF TECHNOLOGIES AND PRODUCT LINES
Income, net of expense, from sale of technologies and product lines increased
from $5.0 million in the September 1999 quarter compared to $5.3 million in the
September 2000 quarter. The $5.0 million in the September 1999 quarter was
related to payments from JetForm and the $5.3 million in the September 2000
quarter was related to royalties and other transition fees received as a result
of our sale of the ACT! and Visual Cafe product lines. Income, net of expense,
from sale of technologies and product lines increased from $9.9 million in the
six month period ending
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
September 1999 to $11.2 million in the six month period ending September 2000.
The $9.9 million in the six month period ending September 1999 was related to
payments from JetForm and the $11.2 million in the six month period ending
September 2000 was related to royalties and other transition fees received as a
result of our sale of the ACT! and Visual Cafe product lines.
INCOME TAX PROVISION
Excluding the impact of goodwill amortization, restructuring charges and
acquired in-process research and development charges, the effective tax rate on
income before income taxes was 32% for the three and six months ended September
30, 2000 and September 30, 1999. This rate is lower than the U.S. federal
statutory tax rate primarily due to a lower statutory tax rate on our Irish
operations.
The tax provision for the six months ended September 2000 consists of a 32% tax
rate applied to income before income taxes and goodwill amortization of $128.1
million, and a $0.8 million tax benefit on $10.4 million of goodwill
amortization. Similarly, the tax provision for the six months ended September
1999 consists of a 32% tax rate applied to income from ongoing operations and a
$3.0 million tax benefit on $13.1 million of goodwill amortization and charges
for restructuring and acquired in-process research and development. The tax
benefit on the goodwill amortization, restructuring and acquired in-process
research and development charges is less than the U.S. federal statutory tax
rate due to non-deductible in-process research and development charges and
certain non-deductible restructuring charges.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments increased approximately $76
million to $508 million at September 30, 2000 from $432 million at March 31,
2000. This increase is largely due to cash provided from operating activities
and net proceeds from the exercise of stock options under our stock option
plans, partially offset by cash paid for capital expenditures and investments.
In addition to cash and short-term investments, we have approximately $72
million of restricted investments as of September 30, 2000 related to collateral
requirements under certain lease agreements. We are obligated under these lease
agreements for two existing office 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.
Net cash provided by operating activities was approximately $121 million and was
comprised of net income of $78 million, non-cash related expenses of $29 million
and a net decrease in assets net of liabilities of $14 million.
Net trade accounts receivable increased $46 million to $93 million at September
30, 2000, from $47 million at March 31, 2000, primarily due to an increase in
revenues in the month of September 2000 compared to the month of March 2000 in
most of our regions.
On March 22, 1999, our Board of Directors authorized the repurchase of up to $75
million of our outstanding common stock, with no expiration date for up to
$20.00 per share. As of September 30, 2000, we have purchased 1,000,000 shares
at prices ranging from $17.90 to $19.90, for an aggregate amount of $18.7
million. All of these shares were purchased in the June 1999 quarter.
We have a $10 million line of credit, which expires in May 2001. We were in
compliance with the debt covenants for this line of credit as of September 30,
2000. As of September 30, 2000, 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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
violation of the line of credit covenants. However, we believe that if the line
of credit is canceled or amounts are not available under the line, there would
not be a material adverse impact on our financial results, liquidity or capital
resources.
If we were to sustain significant losses, we could be required to reduce
operating expenses, which could result in product delays and could cause us to
reassess acquisition opportunities, which could negatively impact our growth
objectives and/or pursue further financing options. We believe existing cash and
short-term investments and cash generated from operating activities will be
sufficient to fund operations for the next year.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to equity price risk on the marketable portion of our portfolio
of equity securities. We typically do not attempt to reduce or eliminate the
market exposure on our securities. As of March 31, 2000, these securities
consisted of approximately 600,000 shares of Interact Commerce Corporation, a
publicly traded company (Nasdaq symbol "IACT"), with a market value of
approximately $16.9 million. Since April 2000, many high-technology stocks have
experienced increased volatility and a significant decrease in value, including
these shares. If these securities had been valued using prices as of October 24,
2000, the value of these securities would have decreased by approximately $11.3
million as compared to the March 31, 2000 value. The value of these securities
may vary over time and the value as of October 24, 2000 was approximately $5.6
million.
In the September 2000 quarter we made an investment of $18 million in a
non-public Internet technology company. As of September 30, 2000 we believe the
value of this investment has not significantly changed.
We believe there has been no other significant changes in our market risk
exposures as what was previously disclosed in our Form 10-K for the year ended
March 31, 2000.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is incorporated by reference to Note 5 of
Notes to Condensed Consolidated Financial Statements included herein on page 9
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 18,
2000 with adjournments on September 22, 2000 and October 3, 2000.
(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 eight 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.............................. 52,873,831 227,293 --
Charles M. Boesenberg....................... 52,137,568 963,556 --
Dr. Per-Kristian Halvorsen.................. 52,877,755 223,369 --
Robert S. Miller............................ 52,886,818 214,306 --
Bill Owens.................................. 52,879,156 221,968 --
George Reyes................................ 52,881,122 220,002 --
Daniel H. Schulman.......................... 52,872,837 228,287 --
John W. Thompson............................ 52,889,331 211,793 --
Broker
For Against Abstain "Non-Votes"
---------- ---------- ------- -----------
2. To consider and act upon a proposal to 22,517,176 21,332,646 222,001 10,579,462
(i) amend Symantec's 1996 Equity Incentive
Plan (the "96 Plan") to make available for
issuance an additional 3,022,900 shares of
Symantec Common Stock, which will raise the
96 Plan's limit on shares that may be issued
pursuant to awards granted from 12,213,202 to
15,236,102.
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29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS, CONTINUED
Broker
For Against Abstain "Non-Votes"
---------- ---------- ------- -----------
3. To consider and act upon a proposal to approve 38,242,892 3,632,639 230,536 10,995,057
Symantec's 2000 Director Equity Incentive Plan
(the "Director Plan").
4. To consider and act upon a proposal to ratify 52,974,012 81,776 45,336 --
the Board of Director's selection of Ernst &
Young LLP as Symantec's independent auditors
for the 2001 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:
2.01 The AXENT Merger Agreement. (Incorporated by reference to
Registrant's Report S-4 filed on September 20, 2000.)
3.01 The Registrant's Restated Certificate of Incorporation.
(Incorporated by reference to Annex G filed with the Registrant's
Joint Management Information Circular and Proxy Statement (No.
000-17781) dated October 17, 1995.)
3.02 The Registrant's Bylaws, as amended and restated effective August
11, 1998. (Incorporated by reference to Exhibit 3.1 filed with the
Registrant's Current Report 8-K filed August 19, 1998.)
10.01 Symantec Corporation 1999 Acquisition Plan Stock Option Agreement
with Acceleration by and between Symantec Corporation and Gary P.
Warren. (Incorporated by reference to Registrant's Report 10-Q
filed August 11, 2000.)
10.02 Employment offer by and between Symantec Corporation and Ron
Moritz. (Incorporated by reference to Registrant's Report 10-Q
filed August 11, 2000.)
10.03 Employment offer by and between Symantec Corporation and Gail
Hamilton. (Incorporated by reference to Registrant's Report 10-Q
filed August 11, 2000.)
10.04 The Registrant's 2000 Directors Equity Incentive Plan.
(Incorporated by reference to Registrant's Report S-8 filed
October 10, 2000.)
27.1 Financial Data Schedule for the Six Months Ended September 30, 2000.
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on July 28, 2000, reporting
that the Company entered into an Agreement and Plan of Merger with Apache
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
Symantec and AXENT Technologies, Inc., a Delaware corporation.
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 13, 2000 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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EXHIBIT INDEX
Description
Exhibits.
2.01 The AXENT Merger Agreement. (Incorporated by reference to
Registrant's Report S-4 filed on September 20, 2000.)
3.01 The Registrant's Restated Certificate of Incorporation.
(Incorporated by reference to Annex G filed with the Registrant's
Joint Management Information Circular and Proxy Statement (No.
000-17781) dated October 17, 1995.)
3.02 The Registrant's Bylaws, as amended and restated effective August
11, 1998. (Incorporated by reference to Exhibit 3.1 filed with the
Registrant's Current Report 8-K filed August 19, 1998.)
10.01 Symantec Corporation 1999 Acquisition Plan Stock Option Agreement
with Acceleration by and between Symantec Corporation and Gary P.
Warren. (Incorporated by reference to Registrant's Report 10-Q
filed August 11, 2000.)
10.02 Employment offer by and between Symantec Corporation and Ron
Moritz. (Incorporated by reference to Registrant's Report 10-Q
filed August 11, 2000.)
10.03 Employment offer by and between Symantec Corporation and Gail
Hamilton. (Incorporated by reference to Registrant's Report 10-Q
filed August 11, 2000.)
10.04 The Registrant's 2000 Directors Equity Incentive Plan.
(Incorporated by reference to Registrant's Report S-8 filed
October 10, 2000.)
27.1 Financial Data Schedule for the Six Months Ended September 30, 2000.