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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 JUNE 29, 2001.
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) 517-8000
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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 1,179,810 shares of Delrina exchangeable stock, as of
July 26, 2001:
COMMON STOCK, PAR VALUE $0.01 PER SHARE 73,522,108 SHARES
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SYMANTEC CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 29, 2001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
as of June 30, 2001 and March 31, 2001............................... 3
Condensed Consolidated Statements of Operations
for the three months ended June 30, 2001 and 2000.................... 4
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 2001 and 2000.................... 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.............. 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 24
Item 6. Exhibits and Reports on Form 8-K........................................ 24
Signatures...................................................................... 25
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
(In thousands) 2001 2001
- ---------------------------------------------------------- ----------- ---------
ASSETS (unaudited)
Current assets:
Cash, cash equivalents and short-term investments $ 629,573 $ 557,027
Trade accounts receivable 115,829 116,661
Inventories 2,464 5,855
Deferred income taxes 76,620 76,426
Other 24,828 25,932
----------- -----------
Total current assets 849,314 781,901
Restricted investments 83,818 74,534
Equipment and leasehold improvements, net 109,218 93,219
Deferred income taxes 3,900 3,900
Acquired product rights, net 96,160 104,287
Goodwill, net 670,584 713,550
Other, net 21,370 20,190
----------- -----------
$ 1,834,364 $ 1,791,581
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 55,127 $ 66,109
Accrued compensation and benefits 36,382 46,420
Deferred revenue 207,778 183,256
Other accrued expenses 41,779 43,385
Income taxes payable 56,508 73,547
----------- -----------
Total current liabilities 397,574 412,717
Long-term obligations 2,363 2,363
Commitments and contingencies
Stockholders' equity:
Preferred stock (authorized: 1,000; issued and outstanding: none) -- --
Common stock (authorized: 300,000; issued and outstanding: 74,220
and 72,006 shares, respectively) 742 720
Capital in excess of par value 1,399,787 1,319,257
Accumulated other comprehensive loss (50,431) (48,872)
Unearned compensation (744) (895)
Retained earnings 85,073 106,291
----------- -----------
Total stockholders' equity 1,434,427 1,376,501
----------- -----------
$ 1,834,364 $ 1,791,581
=========== ===========
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 OPERATIONS
Three Months Ended
June 30,
-----------------------
(In thousands, except per share data; unaudited) 2001 2000
- ---------------------------------------------------------- --------- ---------
Net revenues $ 228,036 $ 191,358
Cost of revenues 42,121 27,837
--------- ---------
Gross margin 185,915 163,521
Operating expenses:
Research and development 39,471 25,769
Sales and marketing 104,303 76,975
General and administrative 11,805 10,001
Amortization of goodwill 48,980 5,175
Amortization of other intangibles from acquisitions 536 280
Restructuring and other expenses 2,046 --
--------- ---------
Total operating expenses 207,141 118,200
--------- ---------
Operating income (loss) (21,226) 45,321
Interest income 7,587 6,752
Income, net of expense, from sale of technologies and product lines 4,250 5,914
Other (expense) income, net (266) 319
--------- ---------
Income (loss) before income taxes (9,655) 58,306
Provision for income taxes 11,563 19,909
--------- ---------
Net income (loss) $ (21,218) $ 38,397
========= =========
Net income (loss) per share - basic $ (0.29) $ 0.63
========= =========
Net income (loss) per share - diluted $ (0.29) $ 0.60
========= =========
Shares used to compute net income (loss) per share -- basic 73,300 60,498
========= =========
Shares used to compute net income (loss) per share -- diluted 73,300 64,248
========= =========
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 FLOWS
Three Months Ended
June 30,
-------------------------
(In thousands; unaudited) 2001 2000
- ------------------------------------------------------------------------------ --------- ---------
Operating Activities:
Net income (loss) $ (21,218) $ 38,397
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of equipment and leasehold improvements 8,275 7,422
Amortization and write-off of acquired product rights 8,212 3,425
Amortization of goodwill and other intangibles from acquisitions 49,516 5,455
Write-off of equipment and leasehold improvements 3,426 --
Deferred income taxes -- (1,151)
Net change in assets and liabilities, excluding effects of acquisitions:
Trade accounts receivable (925) (4,962)
Inventories 3,349 3,085
Other current assets (327) (3,418)
Other assets (1,729) 37
Accounts payable (10,343) 5,292
Accrued compensation and benefits (9,969) (2,946)
Other accrued expenses (4,050) (3,599)
Deferred revenue 24,522 23,748
Income taxes payable (16,410) 22,618
Income tax benefit from stock options 21,740 --
--------- ---------
Net cash provided by operating activities 54,069 93,403
--------- ---------
Investing Activities:
Capital expenditures (28,093) (8,300)
Purchased intangibles -- (200)
Payments for purchase of 20/20 Software (1,535) (4,000)
Purchases of marketable securities (205,813) (140,807)
Proceeds from sales of marketable securities 103,870 100,156
Proceeds from (purchases of) restricted investments (9,284) 10,886
--------- ---------
Net cash used in investing activities (140,855) (42,265)
--------- ---------
Financing Activities:
Net proceeds from sales of common stock and other 58,963 11,755
Principal payments on long-term obligations -- (181)
--------- ---------
Net cash provided by financing activities 58,963 11,574
--------- ---------
Effect of exchange rate fluctuations on cash and cash equivalents 4,775 (1,652)
--------- ---------
Increase (decrease) in cash and cash equivalents (23,048) 61,060
Beginning cash and cash equivalents 227,923 87,973
--------- ---------
Ending cash and cash equivalents $ 204,875 $ 149,033
========= =========
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 as of
June 30, 2001 and for the three months ended June 30, 2001 and 2000 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 our Annual
Report on Form 10-K for the year ended March 31, 2001. The results of operations
for the three months ended June 30, 2001 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.
We have a 52/53-week fiscal accounting year. Accordingly, all references as of
and for the periods ended June 30, 2001, March 31, 2001 and June 30, 2000
reflect amounts as of and for the periods ended June 29, 2001, March 31, 2001
and June 30, 2000, respectively. The three months ended June 30, 2001 and 2000
each comprised 13 weeks of activity.
Recent Accounting Pronouncements
As of April 1, 2001, we adopted Statement of Financial Accounting Standards, or
SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative instruments
and for hedging activities. We generally do not use any derivative instruments
for trading purposes and did not utilize any such instruments in the June 2001
quarter. We, however, utilize some natural hedging to mitigate our foreign
currency exposures and we hedge certain residual exposures through the use of
one-month forward contracts. Due to the short period of time between entering
into the forward contracts and the quarter end, the fair value of the
derivatives as of June 30, 2001 is insignificant and accordingly, the impact of
adopting SFAS No. 133 did not have a material impact on our financial position
or results of operations. Other than these forward contracts, we did not
identify any derivative instruments in the June 2001 quarter.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with SFAS No. 142. Other intangibles will continue to be amortized over their
useful lives. We will adopt SFAS No. 142 in our first quarter of fiscal 2003.
Application of SFAS No. 142 is expected to result in an increase in our results
of operations (pre-tax) of approximately $198 million during fiscal 2003. During
fiscal 2003, we will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of April 1, 2003. We have not
yet determined what effect these tests will have on our earnings and financial
position.
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 2. BALANCE SHEET INFORMATION
June 30, March 31,
(In thousands) 2001 2001
- ---------------------------------------------------------- ----------- ---------
(unaudited)
Cash, cash equivalents and short-term investments:
Cash $ 96,770 $ 97,685
Cash equivalents 108,105 130,238
Short-term investments 424,698 329,104
--------- ---------
$ 629,573 $ 557,027
========= =========
Trade accounts receivable:
Receivables $ 124,310 $ 125,000
Less: allowance for doubtful accounts (8,481) (8,339)
--------- ---------
$ 115,829 $ 116,661
========= =========
Equipment and leasehold improvements:
Computer hardware and software $ 210,191 $ 189,497
Office furniture and equipment 44,597 43,752
Leasehold improvements 32,272 30,313
--------- ---------
287,060 263,562
Less: accumulated depreciation and amortization (177,842) (170,343)
--------- ---------
$ 109,218 $ 93,219
========= =========
Acquired product rights:
Purchased product rights, technologies and workforce-in-place $ 136,029 $ 136,029
Less: accumulated amortization (39,869) (31,742)
--------- ---------
$ 96,160 $ 104,287
========= =========
Goodwill:
Goodwill $ 814,961 $ 808,947
Less: accumulated amortization (144,377) (95,397)
--------- ---------
$ 670,584 $ 713,550
========= =========
Accumulated other comprehensive loss:
Unrealized gain (loss) on available-for-sale investments $ (11) $ 614
Cumulative translation adjustment (50,420) (49,486)
--------- ---------
$ (50,431) $ (48,872)
========= =========
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of tax, were as follows:
Three Months Ended
June 30,
-----------------------
(In thousands; unaudited) 2001 2000
- ------------------------------------------------------------------- -------- --------
Net income (loss) $(21,218) $ 38,397
Other comprehensive loss:
Change in unrealized loss on available-for-sale investments,
net of a tax benefit of $294 and $2,769 (625) (5,884)
Change in cumulative translation adjustment (934) (2,062)
-------- --------
Total other comprehensive loss (1,559) (7,946)
-------- --------
Comprehensive income (loss) $(22,777) $ 30,451
======== ========
NOTE 4. NET INCOME (LOSS) PER SHARE
The components of net income (loss) per share were as follows:
Three Months Ended
June 30,
-----------------------
(In thousands, except per share data; unaudited) 2001 2000
- ------------------------------------------------ --------- -------
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) $ (21,218) $38,397
========= =======
Weighted average number of common
shares outstanding during the period 73,300 60,498
========= =======
Basic net income (loss) per share $ (0.29) $ 0.63
========= =======
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) $ (21,218) $38,397
========= =======
Weighted average number of common
shares outstanding during the period 73,300 60,498
Shares issuable from assumed exercise
of options -- 3,750
--------- -------
Total shares for purpose of calculating
diluted net income (loss) per share 73,300 64,248
========= =======
Diluted net income (loss) per share $ (0.29) $ 0.60
========= =======
For the three months ended June 30, 2001, approximately 7,224,000 shares
issuable from assumed exercises of options were excluded from the computation of
diluted net loss per share, as their effect would have been anti-dilutive due to
the net loss reported in the period. For the three months ended June 30, 2000,
shares issuable from assumed exercise of options exclude approximately 1,752,000
options, 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 5. COMMON STOCK REPURCHASES
On January 16, 2001, the Board of Directors replaced an earlier stock repurchase
program with a new authorization to repurchase up to $700 million, not to exceed
15 million shares, of Symantec common stock with no expiration date. During
fiscal 2001, we repurchased 5.0 million shares at prices ranging from $46.07 to
$51.16, for an aggregate amount of approximately $244.4 million. No shares were
repurchased during the June 2001 and June 2000 quarters. See Note 10 of Notes to
Condensed Consolidated Financial Statements.
NOTE 6. ACQUISITIONS
Acquisition of AXENT
On December 18, 2000, we acquired 100% of the outstanding common stock of AXENT
Technologies, by issuing approximately 14,528,000 shares of our common stock to
AXENT shareholders, based on a predetermined exchange ratio of 0.50 shares of
Symantec common stock for each share of AXENT common stock. We also assumed all
of the outstanding AXENT employee stock options valued at approximately $87
million. The transaction was accounted for as a purchase. The acquisition was
initially recorded in fiscal 2001 for approximately $925 million and allocated
as follows (in thousands):
Net tangible assets of AXENT $ 130,517
In-process research and development 22,300
Tradename 4,100
Workforce-in-place 10,670
Developed technology 75,500
Deferred income taxes (19,080)
Deferred compensation 992
Goodwill 699,660
---------
Total purchase price $ 924,659
=========
In fiscal 2001, we also accrued approximately $18 million in acquisition related
expenses, which included financial advisory, legal and accounting, duplicative
site and fixed assets, and severance costs. As of June 30, 2001, approximately
$1.0 million of this accrual remains, related primarily to legal and accounting,
duplicative site and severance costs.
During the June 2001 quarter, we resolved certain pre-acquisition contingencies,
and as a result, we increased the final purchase price and goodwill by $4.5
million, which remains an accrual as of June 30, 2001. Since all the
pre-acquisition contingencies have not yet been finalized, the allocation of
purchase price and its components may continue to change during fiscal 2002 as
these contingencies are resolved.
The amount allocated to tradename, workforce-in-place, developed technology and
goodwill will be amortized over the useful life of four years. The deferred
compensation related to the options assumed as part of the acquisition will be
amortized over the remaining vesting period.
Acquisition of 20/20 Software
On March 31, 2000, we purchased 100% of the outstanding common stock of 20/20
Software, or 20/20, for up to $16.5 million. The terms of the agreement required
two guaranteed payments totaling approximately $7.5 million. We 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, which
accounted for the $7.5 million guaranteed purchase price. In addition, the
agreement required contingent payments that were based on targeted future sales
of certain of our products from July 1, 2000 to June 30, 2001, with a cumulative
maximum contingency amount of $9.0 million. We
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
recorded contingent amounts of approximately $0.5 million, $4.2 million and $1.6
million during the September 2000, March 2001 and June 2001 quarters,
respectively, resulting in an increase in the purchase price and the amount
allocated to goodwill. Of these additional amounts, $1.6 million remains as an
accrual at June 30, 2001. The goodwill and acquired product rights will be
amortized over a five-year period.
NOTE 7. RESTRUCTURING AND OTHER EXPENSES
During the June 2001 quarter, we recorded approximately $2.0 million for the
costs of severance, related benefits, outplacement and abandonment of certain
facilities primarily related to various restructurings as we continue the
integration of AXENT into our operations. As a result, our workforce was reduced
by 58 employees. As of June 30, 2001, we had an accrual of $0.5 million
remaining related to employee severance and outplacement services that will be
paid throughout fiscal 2002.
Details of the fiscal 2002 restructuring and other expenses were as follows:
Cash/ Original Amount Amount Balance
(In thousands) Non-cash Charge Paid/Used Adjusted 06/30/01
- -------------------------------------- --------- -------- --------- -------- --------
Employee severance and outplacement Cash $ 1,686 $(1,223) -- $ 463
Excess facilities Cash 360 -- -- 360
------- ------- ------ -------
Total restructuring and other expenses $ 2,046 $(1,223) $ -- $ 823
======= ======= ====== =======
During the March 2001 quarter, we reorganized various operating functions,
thereby reducing our workforce by 50 employees, and recorded approximately $1.1
million for the costs of severance, related benefits and outplacement services.
In addition, we provided approximately $1.2 million for costs of severance and
related benefits for six members of our senior management due to a realignment
of certain responsibilities. As of June 30, 2001, we had an accrual of $0.9
million remaining related to employee severance and outplacement services that
will be paid throughout fiscal 2002.
During the December 2000 quarter, we reduced a portion of our operations in
Toronto, thereby reducing our workforce by 10 employees, and recorded
approximately $0.4 million for the costs of severance, related benefits and
abandonment of certain equipment. In addition, approximately $0.9 million was
provided for costs of severance and related benefits for four members of our
senior management due to a realignment of certain responsibilities. These
severance and related benefits were paid by the end of the March 2001 quarter.
Details of the fiscal 2001 restructuring and other expenses were as follows:
Cash/ Original Amount Amount Balance
(In thousands) Non-cash Charge Paid/Used Adjusted 06/30/01
- --------------------------------------- ----------- -------- --------- --------- --------
Employee severance and outplacement Cash $ 3,524 $(2,606) -- $ 918
Excess equipment Non-cash 140 (140) -- --
------- ------- --------- -------
Total restructuring and other expenses $ 3,664 $(2,746) $ -- $ 918
======= ======= ========= =======
As a result of various restructuring and other activities that took place prior
to fiscal 2001, we had recorded charges for employee severance and outplacement
expenses and excess facilities and equipment costs. As of June 30, 2001,
approximately $0.5 million and $0.1 million remains unpaid for excess facilities
costs for restructuring and other expenses recorded in fiscal year 2000 and
1999, respectively.
NOTE 8. LITIGATION AND CONTINGENCIES
On December 23, 1999, Altiris Inc. filed a lawsuit in the United States District
Court, District of Utah, against us, alleging that unspecified Symantec products
including Norton Ghost Enterprise Edition, infringed a patent owned by
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Altiris. The lawsuit requests damages, injunctive relief, costs and attorney
fees. We believe this claim has no merit and we intend to defend the action
vigorously.
On May 12, 1999, a venture capital entity and a former stockholder owning less
than a majority share of CKS Limited, which AXENT acquired in March 1999,
commenced an action in the Suffolk County Superior Court in Boston,
Massachusetts against AXENT and its directors. The action alleges violations of
the Massachusetts Uniform Securities Act, negligent misrepresentations and
unfair trade practices. We inherited this case upon our acquisition of AXENT. We
have reached an agreement in principle for the settlement of this case, which we
believe will result in a definitive settlement of the case in the September 2001
quarter. The terms of the settlement are confidential and are not material to
us.
In July 1998, the Ontario Court of Justice (General Division) ruled that we
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. We
inherited this case through our acquisition of Delrina Corporation, which was
the plaintiff in this lawsuit. We have appealed the decision; however, we
recorded a charge of approximately $5.8 million in the June 1998 quarter,
representing the unaccrued portion of the judgment plus costs. As of June 30,
2001, we believe that we have adequately accrued for both the judgment and all
legal costs.
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. We believe this claim has
no merit and we intend to defend the action vigorously.
On September 15, 1997, Hilgraeve Corporation filed a lawsuit in the United
States District Court, Eastern District of Michigan, against us, alleging that
unspecified Symantec products infringe a patent owned by Hilgraeve. The lawsuit
requested damages, injunctive relief, costs and attorney fees. In March 2000,
the court granted our summary judgment motions and dismissed the case. The
plaintiff has appealed the dismissal and we have cross-appealed. A hearing on
the appeals took place in May 2001, but no decision has been issued.
Over the past few years, it has become common for software companies, including
us, to receive claims of patent infringement. We are currently evaluating claims
of patent infringement asserted by several parties with respect to certain of
our products. While we believe that we have valid defenses to these claims, the
outcome of any related litigation or negotiation could have a material adverse
impact on our future results of operations or cash flows.
We are also involved in a number of other judicial and administrative
proceedings incidental to our business. We intend 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 our financial condition, 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 our future results of operations or cash flows
could be materially adversely affected in a particular period. We have 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 our previously filed Annual Report
on Form 10-K for the year ended March 31, 2001.
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 9. SEGMENT INFORMATION
Our operating segments are significant strategic business units that offer
different products and services, distinguished by customer needs. We have five
operating segments: Consumer Products, Enterprise Security, Enterprise
Administration, Services and Other.
The Consumer Products segment focuses on delivering our security and
problem-solving products to individual users, home offices and small businesses.
The Enterprise Security segment focuses on providing organizations with Internet
security technology, services and response capabilities to deal with their
specific needs. The Enterprise Administration segment focuses on offering
products that enable companies to be more effective and efficient within their
IT departments. The Services segment is focused on providing information
security solutions that incorporate best-of-breed technology, security best
practices and expertise and global resources to help enable E-business success.
The Other segment is comprised of sunset products and products nearing the end
of their life cycle. Also included in the Other segment are all indirect costs,
general and administrative expenses, amortization of goodwill and charges that
are one-time in nature, such as acquired in-process research and development,
judgment settlements 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, operating income (loss), and depreciation and amortization expense:
Consumer Enterprise Enterprise Total
(In thousands; unaudited) Products Security Administration Services Other Company
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30, 2001
Revenue from
external customers $ 66,139 $ 99,643 $ 59,476 $ 2,310 $ 468 $228,036
Operating income (loss) 15,053 13,996 39,243 (5,115) (84,403) (21,226)
Depreciation &
amortization expense 14,658 28,448 6,914 2,036 13,947 66,003
THREE MONTHS ENDED
JUNE 30, 2000
Revenue from
external customers 75,203 54,798 60,567 4 786 191,358
Operating income (loss) 25,614 11,703 41,620 (558) (33,058) 45,321
Depreciation &
amortization expense 4,782 5,216 2,204 81 4,019 16,302
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SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
GEOGRAPHICAL INFORMATION
Three Months Ended
June 30,
-----------------------
(In thousands; unaudited) 2001 2000
- -------------------------------------- -------- --------
Net revenues from external customers:
United States $121,116 $101,421
Other foreign countries 106,920 89,937
-------- --------
$228,036 $191,358
======== ========
NOTE 10. SUBSEQUENT EVENTS
In July 2001, we received $7.5 million upon the surrender of approximately
600,000 shares of Interact, which had merged with The Sage Group plc.
Also in July 2001, we signed an asset purchase agreement to acquire the
enterprise security management division of Foster-Melliar, an IT services
company located in Johannesburg, South Africa. We paid approximately $1.5
million for certain of its assets. Under the terms of the agreement, we may also
be liable for contingency payments based on targeted future sales through fiscal
year 2004, with a maximum contingency amount of $1.5 million.
In July and August 2001, as part of the stock repurchase program approved by the
Board of Directors, we repurchased a total of 925,000 shares of Symantec common
stock at prices ranging from $46.73 to $49.00, for an aggregate amount of $44.5
million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Symantec, a world leader in Internet security technology, provides a broad range
of content and network security solutions to individuals and enterprises. We are
a leading provider of virus protection, firewall, virtual private network,
vulnerability management, intrusion detection, remote management technologies
and security services to consumers and enterprises around the world. Founded in
1982, we have offices in 37 countries worldwide.
RESULTS OF OPERATIONS
The following table sets forth each item from our condensed consolidated
statements of operations as a percentage of net revenues and the percentage
change in the total amount of each item for the periods indicated:
Three Months
Ended Percent
June 30, Change
---------------- in Dollar
(Unaudited) 2001 2000 Amounts
- -------------------------------------------------------- ---- ---- ---------
Net revenues............................................. 100% 100% 19%
Cost of revenues......................................... 18 15 51
---- ----
Gross margin....................................... 82 85 14
Operating expenses:
Research and development............................. 17 13 53
Sales and marketing.................................. 46 40 36
General and administrative........................... 5 5 18
Amortization of goodwill............................. 22 3 846
Amortization of other intangibles from acquisitions.. -- -- *
Restructuring and other expenses..................... 1 -- *
---- ----
Total operating expenses........................ 91 61 75
---- ----
Operating income (loss).................................. (9) 24 (147)
Interest income...................................... 3 3 (12)
Income, net of expense, from sale of
technologies and product lines.................. 2 3 (28)
Other (expense) income, net.......................... -- -- *
---- ----
Income (loss) before income taxes....................... (4) 30 (117)
Provision for income taxes........................... 5 10 (42)
---- ----
Net income (loss)........................................ (9)% 20% (155)
==== ====
* Percentage change is not meaningful
NET REVENUES
Net revenues increased 19% to $228.0 million in the June 2001 quarter from
$191.4 million in the June 2000 quarter. The increase in the June 2001 quarter
as compared to the June 2000 quarter was largely due to increased sales to our
Enterprise Security customers, partially offset by a decline in sales in our
Consumer Products segment. Of the $36.6 million increase in net revenues, $24.8
million was attributable to sales related to AXENT solutions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
INTERNATIONAL
Net revenues from sales outside of North America were $100.1 million and $83.4
million in the June 2001 and 2000 quarter, respectively, and represented 44% of
total net revenues in both quarters. The increase in absolute dollars was
primarily the result of sales growth in Europe, Asia and Latin America.
Weaknesses in international currencies during the June 2001 quarter negatively
impacted our international revenue growth by approximately $7.9 million as
compared to average international currency rates during the June 2000 quarter.
SEGMENTS
The Consumer Products segment provides security and problem-solving products to
individual consumers, home offices and small businesses. The Consumer Products
segment comprised approximately 29% and 39% of net revenues in the June 2001 and
2000 quarter, respectively. The decrease in net revenues for this segment for
the June 2001 quarter compared to the June 2000 quarter was primarily related to
weak consumer and small business spending, which contributed to the decline in
sales of our Macintosh and Norton System Works products.
The Enterprise Security segment provides organizations with Internet security
technology, services and response capabilities to deal with their specific
needs. The Enterprise Security segment comprised approximately 44% and 29% of
net revenues in the June 2001 and 2000 quarter, respectively. The segment's net
revenues increased primarily due to strong growth in our virus protection
solutions and firewall, intrusion detection and vulnerability management
solutions as a result of the AXENT acquisition.
The Enterprise Administration segment offers products that enable companies to
be more effective and efficient within their IT departments. The Enterprise
Administration segment comprised approximately 26% and 32% of net revenues in
the June 2001 and 2000 quarter, respectively. The segment's net revenues
declined slightly in the June 2001 quarter as compared to the June 2000 quarter,
due to a decline in sales of our pcAnywhere product, partially offset by a
growth in our Ghost Corporate Addition product. The decline in our pcAnywhere
product was the result of a decrease in small business and home office sales,
which was partially offset by an increase in corporate sales. Although the
segment's net revenues decreased as a percentage of total revenues, absolute
dollars remained relatively flat in the June 2001 quarter as compared to the
June 2000 quarter.
The Services segment provides information security solutions that incorporate
best-of-breed technology, security best practices and expertise and global
resources to help enable E-business success. Net revenues from this segment
increased substantially in the June 2001 quarter compared to the June 2000
quarter and represented approximately 1% of net revenues. The Other segment is
comprised of sunset products and products nearing the end of their life cycle
and comprised of less than 1% of net revenues in the June 2001 and 2000
quarters.
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,
costs of consulting services, technical support costs and amortization and
write-off of acquired product rights.
Gross margin decreased to 82% of net revenues in the June 2001 quarter from 85%
in the June 2000 quarter. Factors contributing to the decrease in our gross
margin include increased costs associated with consulting service revenue in the
June 2001 quarter as compared to the June 2000 quarter. In addition, technical
support costs included in costs of revenues increased along with the increase in
related enterprise sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses as a percentage of revenue were 17% and 13% in
the June 2001 and 2000 quarter, respectively. Research and development expenses
were approximately $39.5 million and $25.8 million in the June 2001 and 2000
quarter, respectively. The increase was a result of Enterprise Security segment
hiring, salary increases and other employee related expenses and of AXENT
related research and development expenses.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
SALES AND MARKETING EXPENSES
Sales and marketing expenses as a percentage of revenue were 46% and 40% in the
June 2001 and June 2000 quarter, respectively. Sales and marketing expenses were
approximately $104.3 million and $77.0 million in the June 2001 and 2000
quarter, respectively. The increase was a result of Enterprise Security segment
hiring, salary and commission increases and of AXENT related sales and marketing
expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses as a percentage of revenue remained flat at
5% in the June 2001 and 2000 quarters. General and administrative expenses were
approximately $11.8 million and $10.0 million in the June 2001 and 2000 quarter,
respectively. The increase was a result of additional headcount, salary
increases and expenses associated with internal software implementation
projects, offset by a decrease in legal fees.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES FROM ACQUISITIONS
Amortization of goodwill and other intangibles from acquisitions increased
approximately $44.0 million to $49.5 million in the June 2001 quarter from $5.5
million in the June 2000 quarter. The increase was due to the amortization of
goodwill and other intangibles due to our acquisition of AXENT in December 2000.
RESTRUCTURING AND OTHER EXPENSES
During the June 2001 quarter, we recorded approximately $2.0 million for the
costs of severance, related benefits, outplacement and abandonment of certain
facilities primarily related to various restructurings as we continue the
integration of AXENT into our operations. As a result, our workforce was reduced
by 58 employees. See Note 7 of Notes to Condensed Consolidated Financial
Statements in this Form 10-Q.
We recorded no restructuring and other expenses during the June 2000 quarter.
INTEREST AND OTHER INCOME (EXPENSE)
Interest income was approximately $7.6 million and $6.8 million in the June 2001
and 2000 quarters, respectively. The increase in interest income was primarily
due to a higher invested cash balances during the June 2001 quarter compared to
the June 2000 quarter.
Other income (expense) decreased approximately $0.6 million to ($0.3) million of
other expense in the June 2001 quarter from $0.3 million of other income in the
June 2000 quarter.
INCOME, NET OF EXPENSE, FROM SALE OF TECHNOLOGIES AND PRODUCT LINES
Income, net of expense, from sale of technologies and product lines was
approximately $4.3 million in the June 2001 quarter and comprised entirely of
royalty payments from Interact. Income, net of expense, from sale of
technologies and product lines was approximately $5.9 million in the June 2000
quarter and comprised of $5.5 million in royalty payments from Interact and the
last payment of $0.4 million from JetForm.
INCOME TAX PROVISION
Our effective tax rate on income before one-time charges (restructuring and
other expenses) and goodwill amortization expense was 32% in the June 2001 and
2000 quarters. Our effective tax rate was lower than the U.S. federal and state
combined statutory rate primarily due to a lower statutory tax rate on our Irish
operations.
The tax provision of $11.6 million for the June 2001 quarter consisted of a
$12.6 million (or 32% effective tax rate) provision on $39.3 million of income
before goodwill amortization and a $1.0 million tax benefit on the $49.0 million
charge for goodwill amortization. Similarly, the tax provision of $19.9 million
for the June 2000 quarter consisted of a $20.3 million (or 32% effective tax
rate) provision on $63.5 million of income before goodwill amortization and a
$0.4 million tax benefit on the $5.2 million charge for goodwill amortization.
The tax benefit on the charges for goodwill amortization was lower than the U.S.
federal and state combined statutory tax rate due to the non-deductibility of
substantially all of the goodwill amortization.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments increased approximately $73
million to $630.0 million at June 30, 2001 from $557.0 million at March 31,
2001. This increase is largely due to cash provided from operations, including
royalty income from Interact, net proceeds from the exercise of stock options
and sales of common stock through our employee stock purchase plan. The cash
provided by these factors was partially offset by cash paid for capital
expenditures.
In addition to cash and short-term investments, we have approximately $83.8
million of restricted investments as of June 30, 2001 related to collateral
requirements under certain lease agreements. We are obligated under these lease
agreements, for two existing office buildings in Cupertino, California, and for
land and the construction of two office buildings in Newport News, Virginia, and
Springfield, Oregon, to maintain a restricted cash balance invested in U.S.
Treasury securities with maturities not to exceed two to three years through a
certain period of time. In accordance with the lease terms, these funds are not
available to meet our operating cash requirements. These leases are classified
as operating leases. In addition, we are obligated to comply with certain
financial covenants. Future acquisitions or other events may cause us to be in
violation of these financial covenants.
Net cash provided by operating activities was approximately $54.1 million and
was comprised of a net loss of approximately $21.2 million, non-cash related
expenses of $69.4 million and a net increase of $5.9 million in liabilities, net
of a decrease in assets.
Net trade accounts receivable of approximately $115.8 million at June 30, 2001
remained relatively consistent to the balance of approximately $116.7 million at
March 31, 2001.
Net cash used in investing activities was approximately $140.9 million and was
comprised primarily of approximately $111.2 million in net purchases of
marketable securities and investments and $29.7 million of capital expenditures
and other investing activities.
On January 16, 2001, the Board of Directors replaced an earlier stock repurchase
program with a new authorization to repurchase up to $700 million, not to exceed
15 million shares, of Symantec common stock with no expiration date. During
fiscal 2001, we repurchased 5.0 million shares at prices ranging from $46.07 to
$51.16, for an aggregate amount of approximately $244.4 million. No shares were
repurchased during the June 2001 and June 2000 quarters. In July and August
2001, we repurchased a total of 925,000 shares at prices ranging from $46.73 to
$49.00, for an aggregate amount of $44.5 million.
During July 2001, we received $7.5 million upon the surrender of approximately
600,000 shares of Interact, which had merged with The Sage Group plc.
We believe that existing cash and short-term investments and cash generated from
operating results will be sufficient to fund operations for the next year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
BUSINESS RISK FACTORS
The following discussion contains forward-looking statements that involve known
and unknown risks and uncertainties. Our actual results, levels of activity,
performance or achievements may be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Factors that may cause or contribute to this
difference include, among other 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.
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 five acquisitions within the last three fiscal years, with
our acquisition of AXENT in December 2000 being the largest. Integrating
acquired businesses 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 may be amortized or written off in future years. 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
to finance future acquisitions that are dilutive to our existing stockholders.
CONTINUED INTEGRATION OF AXENT MAY BE DIFFICULT, WHICH MAY ADVERSELY AFFECT
OPERATIONS. We have been in the process of integrating AXENT into our operations
since the date of acquisition. This integration of AXENT with our business,
however, has been and will continue to be a complex, time-consuming and
expensive process and may disrupt our business if not accomplished in a timely
and efficient manner. We must operate as a combined organization utilizing
common information and communications systems, operating procedures, financial
controls and human resources practices.
We may still 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;
- the loss of key employees; and/or
- the diversion of management's attention from other ongoing business
concerns.
Further, 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.
OUR INCREASED SALES OF ENTERPRISE-WIDE SITE LICENSES MAY INCREASE FLUCTUATIONS
IN OUR FINANCIAL RESULTS. Sales of enterprise-wide site licenses through our
Enterprise Security segment have been increasing and now represent a major
portion of our business. This portion of our business could increase
significantly due to our recent acquisition of AXENT. This enterprise market has
significantly different characteristics than the consumer market and different
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
skills and resources are needed to penetrate this market. 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 EXPECT TO MAKE SUBSTANTIAL CHANGES TO OUR INFORMATION SYSTEMS THAT COULD
DISRUPT OUR BUSINESS. The information systems that support our accounting,
finance, order management 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
increasingly robust customer relationship management, or CRM, system. During
fiscal 2002, we will be implementing Oracle 11i and a new CRM system. These
types of transitions frequently prove disruptive to the underlying business of
an enterprise and may cause us to incur higher costs than we anticipate. Failure
to manage a smooth transition to the new systems could result in a material
adverse effect on our business operations.
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, 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.
WE ARE EXPOSED TO GENERAL ECONOMIC AND MARKET CONDITIONS, AND THE CURRENT
ECONOMIC DOWNTURN MAY ADVERSELY AFFECT FUTURE REVENUE. Our business is subject
to the effects of general economic conditions and, in particular, market
conditions in the software and computer industries. We believe that our
operating results are being adversely affected by the recent unfavorable global
economic conditions and reduced spending. If these economic conditions do not
improve, or if we experience a worsening in global economic conditions, we may
continue to experience material adverse effects on our business, operating
results and financial condition.
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.
Recently, many of our competitors have significantly lowered the price of their
products and we may have to do the same to remain competitive. 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, to markets or to business models that are
more successful than we anticipate.
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. As a
result, 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.
INTRODUCTION OF NEW OPERATING SYSTEMS MAY ADVERSELY AFFECT OUR FINANCIAL RESULTS
AND STOCK PRICE. The inclusion of security or virus protection 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 Windows XP, which directly compete with our products may
decrease or delay the demand for certain of our
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
products, including those currently under development and products specifically
intended for Windows XP. Our financial results and our stock price declined
significantly following the releases of Windows 3.1, Windows 95 and Windows 98.
The release of future editions of Windows, including Windows XP in our December
2001 quarter, could adversely affect our financial results and stock price.
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.
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 and investors, 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;
- uncertainty about and customer confidence in the current economic
conditions and outlook;
- 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 has
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
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
WE MUST EFFECTIVELY ADAPT TO CHANGES IN THE DYNAMIC TECHNOLOGICAL ENVIRONMENT.
We are increasingly focused on the Internet security market, which, in turn is
dependent on further acceptance and increased use 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
and we are likely to experience delays in future product development. If our
resulting products are not technologically successful, they may not achieve
market acceptance or compete effectively with products of our competitors.
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 cause 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 and cannot 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 purchase 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.
PRODUCT RETURNS MAY NEGATIVELY 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, subject to various
contractual limitations. Our return policy allows distributors, subject to these
contractual 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 or to us directly for a full refund
within a reasonably short period from the date of purchase. We estimate and
maintain reserves for such product returns which to date have been materially
consistent with our actual experience. Future returns could, however, exceed the
reserves we have established, which could have a material adverse effect on our
operating results.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
WE DEPEND ON INTERNAL COMMUNICATIONS SYSTEMS THAT MAY BE DISRUPTED. Our order
management and product shipping centers are geographically dispersed. A business
disruption could occur as a result of natural disasters, intermittent power
shortages in the State of California, 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 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. 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. Competition in recruiting personnel in the software
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. To accomplish this, we believe that we must provide
personnel with a competitive compensation package, including stock options,
which require 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 PRODUCT 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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
and networking configurations, which may cause errors or failures in our
products or may expose 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 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 may not prove effective in limiting our
liability.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe there have been no significant changes in our market risk exposures
during the three months ended June 30, 2001 as compared to what was previously
disclosed in our Form 10-K for the year ended March 31, 2001.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is incorporated by reference to Note 8 of
Notes to Condensed Consolidated Financial Statements included herein on page 10
of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as part of this Form 10-Q:
10.01 Termination agreement by and between Symantec Corporation and
Dana E. Siebert.
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on May 1, 2001, reporting
that Dana E. Siebert, Executive Vice President, Service Provider Solutions
Division, had decided to leave the Company for personal reasons. The
organization that reported to Mr. Siebert has become a part of the
Company's enterprise business operations.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 8, 2001 SYMANTEC CORPORATION
By /s/ John W. Thompson
--------------------------------------
John W. Thompson
Chairman, President and
Chief Executive Officer
By /s/ Gregory Myers
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Gregory Myers
Chief Financial Officer and
Chief Accounting Officer
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Exhibit Index
(a) Exhibits. The following exhibits are filed as part of this Form 10-Q:
10.01 Termination agreement by and between Symantec Corporation and
Dana E. Siebert.