1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 4, 1997. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________ . COMMISSION FILE NUMBER 0-17781 - -------------------------------------------------------------------------------- SYMANTEC CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 77-0181864 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 10201 TORRE AVENUE, CUPERTINO, CALIFORNIA 95014-2132 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code:(408) 253-9600 - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock, including 2,727,519 shares of Delrina exchangeable stock, as of August 1, 1997: COMMON STOCK, PAR VALUE $0.01 PER SHARE 55,806,514 SHARES ================================================================================
2 SYMANTEC CORPORATION FORM 10-Q QUARTERLY PERIOD ENDED JULY 4, 1997 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> Page ---- <S> <C> Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1997 and March 31, 1997............................... 3 Consolidated Statements of Income for the three months ended June 30, 1997 and 1996.................... 4 Consolidated Statements of Cash Flow for the three months ended June 30, 1997 and 1996.................... 5 Notes to Consolidated Financial Statements.............................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................... 20 Item 6. Exhibits and Reports on Form 8-K........................................ 20 Signatures...................................................................... 21 </TABLE>
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SYMANTEC CORPORATION CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, March 31, (In thousands) 1997 1997 --------- --------- ASSETS (unaudited) <S> <C> <C> Current assets: Cash and short-term investments $ 187,272 $ 160,082 Trade accounts receivable 40,972 47,650 Inventories 3,293 4,476 Deferred income taxes 12,801 12,823 Other 14,538 13,166 --------- --------- Total current assets 258,876 238,197 Equipment and leasehold improvements 51,454 51,610 Restricted investments 50,291 47,448 Capitalized software 1,970 2,037 Other 2,974 2,381 --------- --------- $ 365,565 $ 341,673 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 30,657 $ 30,328 Accrued compensation and benefits 17,322 16,241 Other accrued expenses 55,023 53,742 Income taxes payable 10,713 8,276 Current portion of long-term obligations 39 41 --------- --------- Total current liabilities 113,754 108,628 Convertible subordinated debentures 15,000 15,000 Long-term obligations 59 66 Commitments and contingencies Stockholders' equity: Preferred stock (authorized: 1,000 shares; issued and outstanding: none) -- -- Common stock (authorized: 100,000; issued and outstanding: 55,677 and 55,427 shares) 557 554 Capital in excess of par value 291,837 291,548 Notes receivable from stockholders (144) (144) Cumulative translation adjustment (7,634) (7,580) Accumulated deficit (47,864) (66,399) --------- --------- Total stockholders' equity 236,752 217,979 --------- --------- $ 365,565 $ 341,673 ========= ========= </TABLE> The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3
4 SYMANTEC CORPORATION CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended June 30, (In thousands, except per share data; unaudited) 1997 1996 --------- --------- <S> <C> <C> Net revenues $ 135,016 $ 109,218 Cost of revenues 20,920 21,484 --------- --------- Gross margin 114,096 87,734 Operating expenses: Research and development 21,581 23,006 Sales and marketing 61,655 53,779 General and administrative 9,034 7,267 Acquisition, restructuring and other expenses -- 1,295 --------- --------- Total operating expenses 92,270 85,347 --------- --------- Operating income 21,826 2,387 Interest income 2,907 1,684 Interest expense (257) (331) Other expense, net (404) (368) --------- --------- Income before income taxes 24,072 3,372 Provision for income taxes 5,537 337 --------- --------- Net income $ 18,535 $ 3,035 ========= ========= Net income per share $ .32 $ .06 ========= ========= Shares used to compute net income per share 57,125 55,132 ========= ========= </TABLE> The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4
5 SYMANTEC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW <TABLE> <CAPTION> Three Months Ended June 30, (In thousands; unaudited) 1997 1996 --------- --------- <S> <C> <C> Operating Activities: Net income $ 18,535 $ 3,035 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of equipment and leasehold improvements 6,057 5,782 Amortization and write-off of capitalized software costs 316 786 Write-off of equipment and leasehold improvements 1,069 276 Deferred income taxes 41 10 Net change in assets and liabilities: Trade accounts receivable 6,340 3,688 Inventories 1,139 1,950 Other current assets (1,408) 3,952 Capitalized software costs (6) (2,753) Other assets (522) (1,071) Accounts payable 561 (1,084) Accrued compensation and benefits 1,089 (605) Accrued other expenses 1,445 (253) Income taxes payable 2,501 (53) --------- --------- Net cash provided by operating activities 37,157 13,660 --------- --------- Investing Activities: Capital expenditures (6,996) (7,838) Purchased intangibles (258) (195) Purchases of short-term, available-for-sale investments (51,500) (55,000) Maturities of short-term, available-for-sale investments 40,264 38,869 Purchases of long-term, restricted investments (2,843) -- --------- --------- Net cash used in investing activities (21,333) (24,164) --------- --------- Financing Activities: Principal payments on long-term obligations (7) (85) Repurchase of Company's common stock (8,373) -- Net proceeds from sales of common stock and other 8,665 4,131 --------- --------- Net cash provided by financing activities 285 4,046 Effect of exchange rate fluctuations on cash and cash equivalents (155) 224 --------- --------- Increase (Decrease) in cash and cash equivalents 15,954 (6,234) Beginning cash and cash equivalents 95,758 41,777 --------- --------- Ending cash and cash equivalents $ 111,712 $ 35,543 ========= ========= </TABLE> The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5
6 SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 1. BASIS OF PRESENTATION The consolidated financial statements of Symantec Corporation ("Symantec" or the "Company") as of June 30, 1997 and for the three months ended June 30, 1997 and 1996 are unaudited and, in the opinion of management, contain all adjustments, consisting of only normal recurring items necessary for the fair presentation of the financial position and results of operations for the interim periods. These consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Symantec's Annual Report on Form 10-K for the year ended March 31, 1997. The results of operations for the three months ended June 30, 1997 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 June 30, 1997, March 31, 1997 and June 30, 1996 reflect amounts as of and for the periods ended July 4, 1997, March 28, 1997 and June 28, 1996, respectively. The June 30, 1997 quarter comprised 14 weeks of activity, while the comparable prior year period comprised 13 weeks. 6
7 SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 2. BALANCE SHEET INFORMATION <TABLE> <CAPTION> June 30, March 31, (In thousands) 1997 1997 --------- --------- (unaudited) <S> <C> <C> Cash, cash equivalents and short-term investments: Cash $ 27,299 $ 33,755 Cash equivalents 84,413 62,003 Short-term investments 75,560 64,324 --------- --------- $ 187,272 $ 160,082 ========= ========= Trade accounts receivable: Receivables $ 45,305 $ 51,950 Less: allowance for doubtful accounts (4,333) (4,300) --------- --------- $ 40,972 $ 47,650 ========= ========= Inventories: Raw materials $ 1,397 $ 1,736 Finished goods 1,896 2,740 --------- --------- $ 3,293 $ 4,476 ========= ========= Equipment and leasehold improvements: Computer equipment $ 95,118 $ 91,533 Office furniture and equipment 27,843 27,706 Leasehold improvements 19,150 17,697 --------- --------- 142,111 136,936 Less: accumulated depreciation and amortization (90,657) (85,326) --------- --------- $ 51,454 $ 51,610 ========= ========= Capitalized software: Purchased product rights $ 849 $ 591 Capitalized software costs 2,470 2,465 Less: accumulated amortization of purchased product rights (177) (55) Less: accumulated amortization of capitalized software costs (1,172) (964) --------- --------- $ 1,970 $ 2,037 ========= ========= Other accrued expenses: Acquisition and restructuring expenses $ 3,319 $ 3,833 Deferred revenue 16,205 13,825 Marketing development funds 12,702 12,529 Other 22,797 23,555 --------- --------- $ 55,023 $ 53,742 ========= ========= </TABLE> NOTE 3. ACQUISITION, RESTRUCTURING AND OTHER EXPENSES In connection with the acquisition of Fast Track, Inc. in May 1996, Symantec recorded total acquisition charges of $0.6 million in the quarter ended June 30, 1996. The charges included $0.4 million for legal, accounting and financial advisory services and $0.2 million for the consolidation and discontinuance of certain operational activities and other acquisition related expenses. During the quarter ended June 30, 1996, Symantec also recorded $0.7 million for costs related to the centralization of certain research and development activities, litigation settlement costs and other non-recurring expenses. 7
8 NOTE 4. LITIGATION AND CONTINGENCIES On March 18, 1996, a class action complaint was filed by the law firm of Milberg, Weiss, Bershad, Hynes & Lerach in Superior Court of the State of California, County of Santa Clara, against the Company and several of its current and former officers and directors. The complaint alleges that Symantec insiders inflated the stock price and then sold stock based on inside information that sales were not going to meet analysts' expectations. The complaint seeks damages in an unspecified amount. The complaint has been refiled twice in state court, most recently on January 10, 1997, to reflect changes brought about by Symantec's demurrer to previous complaints. The same plaintiffs have further filed, on January 7, 1997, a complaint in federal court based on the same facts as the state court complaint, for violation of the Securities Exchange Act of 1934. Symantec believes that neither the state court complaint nor the federal court complaint has any merit and will vigorously defend itself against both complaints. The Company has accrued certain estimated legal fees and expenses related to this matter; however, actual amounts may differ materially from those estimated amounts. On June 11, 1992, Dynamic Microprocessor Associates, Inc. ("DMA"), a former wholly-owned subsidiary of Symantec which has since been merged into Symantec, commenced an action against EKD Computer Sales & Supplies Corporation ("EKD"), a former licensee of DMA and Thomas Green, a principal of EKD, for copyright infringement, violations of the Lanham Act, trademark infringement, misappropriation, deceptive acts and practices, unfair competition and breach of contract. EKD and Mr. Green have signed a settlement agreement which fully settles this case. Under the settlement agreement EKD and Mr. Green have agreed not to take certain actions related to Symantec/DMA and its products, including manufacturing pcANYWHERE, using the pcANYWHERE mark or distributing, exploiting, marketing, advertising, selling, promoting or purporting to license any of Symantec/DMA's products. EKD and Mr. Green are also permanently enjoined from representing or in any way suggesting that EKD is an authorized reseller or licensee of DMA or Symantec. In addition, under the settlement agreement, EKD and Mr. Green release DMA and Symantec from any claims that EKD or Mr. Green have against Symantec/ DMA as of the date of the agreement. The settlement agreement does not require Symantec/DMA to make any payments to EKD or Mr. Green. On April 10, 1997, Trio Systems LLC filed a lawsuit in the United States District Court, Central District of California, against Symantec, for damages, injunctive and declaratory relief and for the imposition of a constructive trust claiming copyright infringement, fraud, misrepresentation and breach of contract, based on Symantec's alleged inclusion, in its Norton Utilities, Norton Your Eyes Only and pcANYWHERE products, of Trio's C-Index code. Symantec believes these claims have no merit and intends to defend this action vigorously. On April 23, 1997, Symantec filed a lawsuit against McAfee Associates in the United States District Court, Northern District of California, for copyright infringement and unfair competition. Symantec believes McAfee Associates copied portions of Symantec's copyrighted software code and unlawfully incorporated such code into certain of McAfee's products. On July 21, 1997 Symantec filed a motion to amend its complaint in order to expand the lawsuit to include additional Symantec code in additional McAfee products. The expansion of the lawsuit is based on Symantec's findings through the discovery process in the lawsuit, confirmed by an independent software expert operating under the Court's order, that Symantec's copyrighted code appears in additional McAfee products, including McAfee's flagship product, VirusScan. Symantec plans to aggressively pursue its remedies under this lawsuit, which include both injunctive relief and monetary damages. On May 13, 1997, Trend Micro Incorporated filed a lawsuit in the United States District Court, Northern District of California, against Symantec Corporation and McAfee Associates, alleging against Symantec patent infringement by the Symantec product known as Norton AntiVirus for Internet E-mail Gateways. The lawsuit requests damages, injunctive relief and costs and attorney fees. Symantec believes this claim has no merit and intends to defend the action vigorously. 8
9 SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Symantec is currently evaluating claims of patent infringement asserted by IBM with respect to certain of the Company's products. While the Company believes that it has valid defenses to these claims, there can be no assurance that the outcome of any related litigation or negotiation would not 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 effect on the financial position of the Company. However, depending on the amount and timing of an unfavorable resolution of these lawsuits, it is possible that the Company's future results of operations or cash flows could be materially adversely affected in a particular period. NOTE 5. STOCK REPURCHASE On April 29, 1997, the Board of Directors of Symantec authorized the repurchase of up to 1,000,000 shares of Symantec common stock by June 13, 1997. As of June 13, 1997, management completed the repurchase of 500,000 shares at prices ranging from $16.57 to $17.00 per share. NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement (SFAS) No. 128, "Earnings per Share", which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. The application of the SFAS 128 new "basic earnings per share" calculation results in basic earnings per share of $0.33 and $0.06 for the quarters ended June 30, 1997 and June 30, 1996, respectively. The Company does not expect the new diluted calculation to be materially different to primary and fully diluted earnings per share. In June 1997, the Financial Accounting Standards Board issued Statement (SFAS) No.130, "Reporting Comprehensive Income", which establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements and is required to be adopted by Symantec beginning in fiscal 1999. Additionally, the Financial Accounting Standards Board issued Statement (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way that public business enterprises report information in annual statements and interim financial reports regarding operating segments, products and services, geographic areas and major customers. SFAS 131 is first effective for Symantec for fiscal 1999 and will apply to both annual and interim financial reporting subsequent to this date. Symantec management is currently evaluating the implication of these statements on operations. 9
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and section 27A of the Securities Act of 1933, as amended. These forward-looking statements are subject to significant risks and uncertainties, including those identified in the section "Factors That May Affect Future Results" and in the Company's annual report on Form 10-K for the year ended March 31, 1997, and may cause actual results to differ materially from those discussed in such forward-looking statements. The forward-looking statements within this Form 10-Q are identified by words such as "believes," "anticipates," "expects," "intends," "may" and other similar expressions. However, these words are not the exclusive means of identifying such statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the Securities and Exchange Commission. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission, including its Form 10-K, that attempt to advise interested parties of the risks and factors that may affect the Company's business. FACTORS THAT MAY AFFECT FUTURE RESULTS RAPID TECHNOLOGICAL CHANGE AND DEVELOPMENT RISKS. The Company participates in a highly dynamic industry. Future technology or market changes may cause certain of Symantec's products to become obsolete more quickly than expected and the trend towards server-based applications in networks and applications distributed over the Internet could have a material adverse effect on sales of the Company's products. The impact of diminished market acceptance and adoption rate of Symantec's products may result in reduced revenues, gross margins and net income, as well as significant increases in the volatility of Symantec's stock price. STOCK PRICE VOLATILITY. The Company's earnings and stock price have been and may continue to be subject to significant volatility, particularly on a quarterly basis. Symantec has previously experienced shortfalls in revenue and earnings from levels expected by securities analysts and investors, which has had an immediate and significant adverse effect on the trading price of the Company's common stock. This may occur again in the future. Additionally, as a significant portion of the Company's revenues often occur late in the quarter, the Company may not learn of revenue shortfalls until late in the fiscal quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's common stock. PERSONAL COMPUTER AND HARDWARE GROWTH RATES. Fluctuations in customer spending from software to hardware as the result of technological advancements in hardware or price reductions of hardware have in the past and may in the future result in reduced revenues which would have a material adverse effect on operating results. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. While Symantec's diverse product line has tended to lessen fluctuations in quarterly net revenues, these fluctuations have occurred in the past and are likely to occur in the future. These fluctuations may be caused by a number of factors, including the introduction of competitive products by competitors, the timing of new product introductions by Symantec and market acceptance of such products, reduced demand for any given product, seasonality in the retail software market, the market's transition between operating systems, the impact of the Internet and general economic conditions. These factors may cause significant fluctuations in net revenues and, accordingly, operating results. 10
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED MANAGEMENT OF EXPANDING OPERATIONS. Symantec continually evaluates its product and corporate strategy and has in the past and will in the future undertake organizational changes and product and marketing strategy modifications which are designed to maximize market penetration, maximize use of limited corporate resources and develop new products and product channels. These organizational changes increase the risk that objectives will not be met due to the allocation of valuable resources to implement changes. Further, due to the uncertain nature of any of these undertakings, there can be no assurance that these efforts will be successful or that the Company will realize any benefit from these efforts. Symantec has completed a number of acquisitions and may acquire other companies in the future. Acquisitions involve a number of special risks, including the diversion of management's attention to assimilation of the operations and personnel of the acquired companies in an efficient and timely manner, the retention of key employees, the difficulty of presenting a unified corporate image, the coordination of research and development and sales efforts and the integration of the acquired products. The Company has lost certain key employees of acquired companies, and, in some cases, the assimilation of the operations of acquired companies took longer than initially had been anticipated by the Company. In addition, because the employees of acquired companies have frequently remained in their existing, geographically diverse facilities, the Company has not realized certain economies of scale that might otherwise have been achieved. Symantec typically incurs significant expenses in connection with acquisitions, which have a significant adverse impact on the Company's profitability and financial resources. These expenses may have a significant adverse impact on the Company's future profitability and financial resources. FOREIGN OPERATIONS. A significant portion of Symantec's revenues, manufacturing costs and marketing is transacted in foreign currencies. As a result, the Company may be materially and adversely affected by fluctuations in currency exchange rates, as well as increases in duty rates, exchange or price controls or other restrictions on foreign currencies. The Company's international operations are subject to certain risks common to international operations, such as government regulations, import restrictions, currency fluctuations, repatriation restrictions and, in certain jurisdictions, reduced protection for the Company's copyrights and trademarks. PRICE COMPETITION. Price competition is intense in the microcomputer business software market and is expected to continue to increase and become even more significant in the future, resulting in reduced profit margins. Should competitive pressures in the industry continue to increase, Symantec may be required to reduce software prices and/or increase its spending on sales, marketing and research and development as a percentage of net revenues, resulting in lower profit margins. There can be no assurance these changes will be successful. DISTRIBUTION CHANNELS. These customers tend to make the majority of their purchases at the end of the fiscal quarter, in part because they are able, or believe that they are able, to negotiate lower prices and more favorable terms. This end-of-period buying pattern means that forecasts of quarterly and annual financial results are particularly vulnerable to the risk that they will not be achieved, either because expected sales do not occur or because they occur at lower prices or on less favorable terms to the Company. The Company's retail distribution customers also carry the products of Symantec's competitors. The distributors have limited capital to invest in inventory, and their decisions to purchase the Company's products is partly a function of pricing, terms and special promotions offered by Symantec as well as by its competitors over which the Company has no control and which it cannot predict. Agreements with distributors are generally nonexclusive and may be terminated by either party without cause. Such distributors are not within the control of Symantec, are not obligated to purchase products and may also represent competitors' product lines. There can be no assurance that these distributors will continue their current relationships with Symantec on the same basis, or that they will not give higher priority to the sale of competitors' products. Additionally, certain distributors and resellers have experienced financial difficulties in the past. There can be no assurance that distributors that account for significant sales of the Company will not experience financial difficulties in 11
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED the future. Any such problems could lead to reduced sales and could adversely affect operating results of the Company. There can be no assurance that Symantec will be able to continue to obtain adequate distribution channels for all of its products in the future. Due to the rapid change in software distribution technology as demonstrated by the increase in volume of software distributed through the Internet, there can be no assurance that Symantec will be able to develop an effective method of distributing its software products utilizing each of the available distribution channels or that Symantec will develop distribution channels for those channels which are ultimately accepted by the marketplace. The presence of new channels could adversely impact existing channels and/or product pricing, which could have a material adverse impact on the Company's net revenues and profitability. The Company operates with relatively little backlog; therefore, if near-term demand for the Company's products weakens in a given quarter, there could be an immediate, material adverse effect on net revenues and on the Company's operating results, which would likely result in a precipitous drop in stock price. CHANNEL FILL. The Company's pattern of revenues and earnings may be affected by "channel fill." Channel fill occurs following the introduction of a new product as distributors buy significant quantities of the new product in anticipation of sales of such product. Software upgrades typically result in an increase in net revenues during the first three to six months following their introduction due to purchases by existing users, usually at discounted prices, and initial inventory purchases by Symantec's distributors. Following such purchases, the rate of distributors' purchases often declines in a material amount, depending on the rates of purchases by end users or "sell-through." As the desktop applications market has become more saturated, the sales mix is shifting from standard retail products to lower priced product upgrades. This trend is likely to continue. Channel fill may also occur in anticipation of price increases or in response to sales promotions or incentives, some of which may be designed to encourage customers to accelerate purchases that might otherwise occur in later periods. Channels may also become filled simply because the distributors do not sell their inventories to retail distribution or end users as anticipated. If sell-through does not occur at a sufficient rate, distributors will delay purchases or cancel orders in later periods or return prior purchases in order to reduce their inventories. Such order delays or cancellations can cause material fluctuations in revenues from one quarter to the next. The impact is somewhat mitigated by the Company's deferral of revenue associated with inventories estimated to be in excess of appropriate levels in the distribution channel; however, net revenues may still be materially affected favorably or adversely by the effects of channel fill. Between the date Symantec announces a new version or new product and the date of release, distributors, dealers and end users often delay purchases, cancel orders or return products in anticipation of the availability of the new version or new product. Channel fill did not have a material impact on the Company's revenues in the first quarter of fiscal 1998, but may have a material impact in future periods, particularly in periods where a large number of new products are simultaneously introduced. PRODUCT RETURNS. The Company estimates and maintains reserves for product returns. Product returns can occur when the Company introduces upgrades and new versions of products or when distributors have excess inventories. Symantec's return policy allows its distributors, subject to certain limitations, to return purchased products in exchange for new products or for credit towards future purchases. End users may return products through dealers and distributors within a reasonable period from the date of purchase for a full refund, and retailers may return older versions of products. Symantec prepares detailed analyses of historical return rates, as well as taking into consideration upcoming product upgrades, current market conditions, customer inventory balances and any other known factors when estimating anticipated returns and maintains reserves for product returns. Symantec has experienced, and may experience in the future, significant increases in product returns above historical levels from customers of acquired companies after an acquisition is completed. The impact of actual returns on net revenues, 12
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED net of such provisions, has not had a material effect on the Company's liquidity as the returns typically result in the issuance of credit towards future purchases as opposed to cash payments to the distributors. However, there can be no assurance that future returns will not exceed the reserves established by the Company or that future returns will not have a material adverse effect on the operating results of the Company. UNCERTAINTY OF RESEARCH AND DEVELOPMENT EFFORTS. Symantec believes research and development expenditures will be necessary in order to remain competitive. While the Company believes its research and development expenditures will result in successful product introductions, due to the uncertainty of software development projects, these expenditures will not necessarily result in successful product introductions. Uncertainties impacting the success of software development project introductions include technical difficulties, market conditions, competitive products and customer acceptance of new products and operating systems. The length of Symantec's product development cycle has generally been greater than Symantec originally expected. Although such delays have undoubtedly had a material adverse effect on Symantec's business, Symantec is not able to quantify the magnitude of net revenues that were deferred or lost as a result of any particular delay because Symantec is not able to predict the amount of net revenues that would have been obtained had the original development expectations been met. Delays in future product development are likely to occur and could have a material adverse effect on the amount and timing of future revenues. Due to the inherent uncertainties of software development projects, Symantec does not generally disclose or announce the specific expected shipment date of the Company's product introductions. While the Company performs extensive usability and beta testing of new products, there can be no assurance that any products currently being developed by Symantec will be technologically successful, that any resulting products will achieve market acceptance or that the Company's products will be effective in competing with products either currently in the market or introduced in the future. OPERATING SYSTEM. The release and subsequent customer acceptance of current or enhanced operating systems are particularly important events that increase the uncertainty and increase the volatility of Symantec's results. Microsoft has incorporated advanced utilities including telecommunications, facsimile and data recovery utilities in Windows 95 and may include additional product features in Windows 98 or future releases of Windows NT that may decrease the demand for certain of the Company's products, including those currently under development. Should the Company be unable to successfully or timely develop products that operate under existing or new operating systems, the Company's future net revenues and operating results would be immediately and significantly adversely affected. In addition, as the timing of delivery and adoption of many of Symantec's products is dependent on the adoption rate of these operating systems, which the Company and securities analysts are unable to predict, the ability of Symantec and securities analysts to forecast the Company's net revenues has been and will continue to be adversely impacted. As a result, there is a heightened risk that net revenues and profits will not be in line with analysts' expectations in the periods following the introduction of existing or new operating systems. INTELLECTUAL PROPERTY RIGHTS. Symantec regards its software as proprietary and relies on a combination of copyright, patent and trademark laws and license agreements in an attempt to protect its rights. Despite these precautions, it may be possible for unauthorized third parties to copy aspects of Symantec's products or to obtain and use information that Symantec regards as proprietary. All of Symantec's products are protected by copyright, and Symantec has several patents and patent applications pending. However, existing patent and copyright laws afford limited practical protection. In addition, the laws of some foreign countries do not protect Symantec's proprietary rights in its products to the same extent as do the laws of the United States. Symantec's products are not copy protected. 13
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED As the number of software products in the industry increases and the functionality of these products further overlap, Symantec believes that software developers will become increasingly subject to infringement claims. This risk is potentially greater for companies, such as Symantec, that obtain certain of their products through publishing agreements or acquisitions, since they have less direct control over the development of those products. In addition, an increasing number of patents are being issued that are potentially applicable to software, and allegations of patent infringement are becoming increasingly common in the software industry. It is impossible to ascertain all possible patent infringement claims because new patents are being issued continually, the subject of patent applications is confidential until a patent is issued, and it may not be apparent even from a patent that has already been issued whether it is potentially applicable to a particular software product. This increases the risk that Symantec's products may be subject to claims of patent infringement. Although such claims may ultimately prove to be without merit, they are time consuming and expensive to defend. Symantec has been involved in disputes claiming patent infringement in the past, is currently involved in such disputes and litigation and may be involved in the future in such disputes and/or litigation. If Symantec is alleged to infringe one or more patents, it may choose to litigate the claim and/or seek an appropriate license. If litigation were to commence and a license were not available on reasonable terms or if another party were found to have a valid patent claim against Symantec, it could have a material adverse effect on Symantec's business, operating results and financial condition (See Note 4 of Notes to Consolidated Financial Statements). LITIGATION. Symantec is involved in a number of other judicial and administrative proceedings incidental to its business (See Note 4 of Notes to Consolidated Financial Statements). The Company intends to defend and/or pursue all of these lawsuits vigorously and, although an unfavorable outcome could occur in one or more of the cases, the final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on the financial position of the Company. However, depending on the amount and timing of an unfavorable resolution of these lawsuits, it is possible that the Company's future results of operations or cash flows could be materially adversely effected in a particular period. SALES AND MARKETING AND SUPPORT INVESTMENTS. Symantec believes substantial sales and marketing efforts are essential to achieve revenue growth and to maintain and enhance Symantec's competitive position. There can be no assurance that these increased sales and marketing efforts will be successful. BUSINESS DISRUPTION. Much of the Company's administration, sales and marketing, manufacturing and research and development facilities are located on the west coast of the United States. Future earthquakes or other natural disasters could cause a significant disruption to the Company's operations and may cause delays in product development that could adversely impact future revenues of the Company. Order entry and product shipping are geographically separated both domestically and internationally. A disruption in communications between these facilities, particularly at the end of a fiscal quarter, would likely result in an unexpected shortfall in net revenues and could result in an adverse impact on operating results. SUPPLY RISK. Symantec has often been able to acquire materials on a volume-discount basis and has had multiple sources of supply for certain materials. To date, Symantec has not experienced any material difficulties or delays in production of its software and related documentation and packaging. However, shortages may occur in the future. For example, shortages of certain materials may occur when Microsoft introduces new operating systems. EMPLOYEE RISK. Competition in recruiting personnel in the software industry is intense. Symantec believes that its future success will depend in part on its ability to recruit and retain highly skilled management, marketing and technical personnel. Symantec believes that it must provide personnel with a competitive compensation package, which necessitates the continued availability of stock options and requires ongoing shareholder approval of such option programs. 14
15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED OVERVIEW Symantec develops, markets and supports a diversified line of application and system software products designed to enhance individual and workgroup productivity. Symantec's business strategy is to satisfy customer needs by developing and marketing products across multiple operating platforms that make customers productive and keep their computers safe and reliable - anywhere, anytime. Founded in 1982, the Company has offices in the United States, Canada, Asia, Australia, Europe, Africa and Latin America. Symantec has a 52/53-week fiscal accounting year. The June 30, 1997 quarter comprised 14 weeks of revenue and expense activity, while the comparable prior year period comprised 13 weeks. RESULTS OF OPERATIONS The following table sets forth each item from the 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. <TABLE> <CAPTION> Three Months Ended Percent June 30, Change -------------------- in Dollar 1997 1996 Amounts ------ ------ --------- <S> <C> <C> <C> Net revenues 100% 100% 24% Cost of revenues 15 20 (3) ------ ------ Gross margin 85 80 30 Operating expenses: Research and development 16 21 (6) Sales and marketing 46 49 15 General and administrative 7 7 24 Acquisition, restructuring and other expenses -- 1 * ------ ------ Total operating expenses 69 78 8 ------ ------ Operating income 16 2 814 Interest income 2 1 73 Interest expense -- -- (22) Other expense, net -- -- 10 ------ ------ Income before income taxes 18 3 614 Provision for income taxes 4 -- 1,543 ------ ------ Net income 14% 3% 511 ====== ====== </TABLE> * percentage change is not meaningful. 15
16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED NET REVENUES. Net revenues increased 24% from $109 million in the quarter ended June 30, 1996 to $135 million in the quarter ended June 30, 1997. During the June 1997 quarter, Symantec experienced increased net revenues from each of its business units: Remote Productivity Solutions and Security and Assistance. The Remote Productivity Solutions business unit helps remote professionals remain productive and work reliably, anywhere, anytime. The specific customer needs focused on by this business unit include: connecting, performance and remote security, managing multiple data sources, and accessing data, people and applications. Increased net revenues primarily resulted from increased Norton pcANYWHERE for Windows 95 and WinFax Pro for Windows 95 version 8.0 sales during the June 1997 quarter, as compared to the June 1996 quarter. Net revenues from the Remote Productivity Solutions group comprised approximately 35% of the Company's net revenues for both June 1997 and June 1996 quarters. The Security and Assistance business unit is dedicated to being indispensable to customers' daily use of computers by increasing productivity and keeping computers safe and reliable. Increased net revenues were primarily related to Windows 95 and Windows NT platform sales of Norton Utilities and Norton AntiVirus for the June 1997 quarter, as compared to the June 1996 quarter. Net revenues from the Security and Assistance business unit comprised approximately 50% of net revenues for both June 1997 and June 1996 quarters. The remaining 15% of the Company's revenue includes Internet Tools product revenues, royalty and revenue streams from the sale of certain of Symantec's software product lines and revenues from products nearing the end of their life cycles. A majority of the revenue included in the 15% is comprised of payment and royalty streams related to the sale of software products and related tangible assets to JetForm Corporation ("JetForm") and Hewlett-Packard ("Hewlett-Packard") during fiscal 1997. For a discussion of the related sale transactions, see Symantec's annual report on Form 10-K for the year ended March 31, 1997, Note 9. Sale of Product Rights. Net revenues from international sales were approximately $40 million and $35 million and represented 30% and 32% of total net revenues in the June 1997 and 1996 quarters, respectively. Net revenues from Europe were flat between comparable June quarterly periods, while net revenues increased by 63% in Asia Pacific, 12% in Japan and 102% in Latin America. GROSS MARGIN. Gross margin represents net revenues less cost of revenues. Cost of revenues consists primarily of manufacturing expenses, manuals, packaging, royalties paid to third parties under publishing contracts and amortization and write-off of capitalized software. Gross margins were 85% and 80% for the quarters ended June 30, 1997 and 1996, respectively. The increase in the gross margin percentage is primarily due to a change in the sales product mix between comparable June quarters. During fiscal 1997, Symantec sold its low margin electronic forms software and Networking Business Unit software, while sales have grown for the Company's higher margin core products. As mentioned above, Symantec received payments from JetForm and Hewlett-Packard during the June 1997 quarter, for which no costs were associated. Amortization of capitalized software, including the amortization and write-off of both purchased product rights and capitalized software development expenses, decreased during the June 30, 1997 quarter as compared to the June 30, 1996 quarter, as the result of the write-off of a significant portion of Symantec's capitalized software development costs associated with the Company's Networking Business Unit, which was sold to Hewlett-Packard during the March 1997 quarter. 16
17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased 6% to $22 million or 16% of net revenues in the quarter ended June 30, 1997 from $23 million or 21% of net revenues in the quarter ended June 30, 1996. Research and development expenditures are generally charged to operations as incurred. The decrease in research and development expense is principally due to elimination of research and development efforts related to the Networking Business Unit, which was sold to Hewlett-Packard during the March 1997 quarter, as well as decreased product development efforts associated with certain of the Company's software products. During the June 30, 1996 quarter, Symantec's research and development costs were reduced by the capitalization of approximately $3 million of software development costs, which primarily related to the Company's Networking Business Unit. Subsequent to the sale of the Networking Business Unit to Hewlett-Packard during the March 1997 quarter, no software development costs have been identified by Symantec for capitalization under FAS 86 requirements. SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 15% to approximately $62 million or 46% of net revenues in the quarter ended June 30, 1997 from approximately $54 million or 49% of net revenues in the prior year's comparable quarter. The increase in sales and marketing expenses was principally related to the increased sales activity during the June 1997 quarter. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased from approximately $7 million or 7% of net revenues in the quarter ended June 30, 1996 to approximately $9 million or 7% of net revenues in the quarter ended June 30, 1997. While general and administrative expenses remained constant as a percentage of revenue between comparable June quarters, the absolute dollar increase in these expenses related to increased business activities and management consulting expenditures. ACQUISITION, RESTRUCTURING AND OTHER EXPENSES. Acquisition Expenses. No acquisition expenses were recorded during the quarter ended June 30, 1997. In the quarter ended June 30, 1996, Symantec recorded total acquisition charges of $0.6 million in connection with the acquisition of Fast Track, Inc. The charges included $0.4 million for legal, accounting and financial advisory services and $0.2 million for the consolidation and discontinuance of certain operational activities and other acquisition related expenses. Other Non-Recurring Expenses. No other non-recurring expenses were recorded during the quarter ended June 30, 1997. During the quarter ended June 30, 1996, Symantec recorded $0.7 million for costs related to the centralization of certain research and development activities, litigation settlement costs and other non-recurring expenses. As of June 30, 1997, total remaining accrued acquisition, restructuring and other expenses were approximately $3 million. 17
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME (EXPENSE). Interest income was $3 million and $2 million in the quarters ended June 30, 1997 and 1996, respectively. The increase in interest income for the comparable three month periods is due to higher average invested cash balances. Interest expense was $0.3 million for each of the quarters ended June 30, 1997 and 1996. Interest expense is principally related to convertible subordinated debentures. Other expense is primarily comprised of foreign currency exchange gains and losses from fluctuations in foreign currency exchange rates. Symantec conducts business in various foreign currencies and is therefore subject to the transaction exposures that arise from foreign exchange rate movements between the dates that foreign currency transactions are recorded and the dates that they are settled. Symantec utilizes some natural hedging to mitigate Symantec's transaction exposures and hedges some residual transaction exposures through the use of one-month forward contracts. At June 30, 1997, there was a total of approximately $54 million of outstanding forward exchange contracts. The net liability of forward contracts was approximately $41 million at June 30, 1997. There have been no significant gains or losses to date with respect to these activities. Gains or losses would occur on forward contracts held by Symantec when changes in foreign currency exchange rates occur. These gains and losses should be largely offset by the transaction gains and losses resulting from foreign currency denominated cash, accounts receivable, trade payables, intercompany balances, and short-term notes. There can be no assurance that these strategies will continue to be effective or that transaction gains or losses can be minimized or forecasted accurately. Symantec does not hedge its translation risk. INCOME TAX PROVISION. The effective tax provision for the three months ended June 30, 1997 was 23%, which is lower than the U.S. federal statutory tax rate due primarily to the utilization of previously unbenefitted net operating losses and tax credits. Symantec believes that the effective tax rate may increase in future fiscal years. The effective tax provision for the three months ended June 30, 1996 was 10%. LIQUIDITY AND CAPITAL RESOURCES Cash, short-term investments and restricted investments increased $30 million to approximately $238 million at June 30, 1997 from approximately $208 million at March 31, 1997. This increase was largely due to cash provided from operating activities, net proceeds from the exercise of stock options and the sales of common stock under the Employee Stock Purchase Plan, and improved cash collections of trade accounts receivable. The restricted investment balance relates to collateral requirements under lease agreements entered into by Symantec during the 1997 fiscal year. Symantec is obligated under lease agreements for two existing office buildings, one parcel of land and one office building under construction in Cupertino, California to maintain a restricted cash balance invested in U.S. treasury notes with maturities not to exceed three years. In accordance with the lease terms, these funds are not available to meet operating cash requirements. Net cash provided by operating activities was approximately $37 million and was comprised of the Company's net income of $19 million and non-cash related expenses of $7 million and a net decrease in assets and liabilities of $11 million. Trade accounts receivable decreased $7 million from approximately $48 million at March 31, 1997 to approximately $41 million at June 30, 1997 primarily due to improved cash collections and realization of a lower percentage of quarterly revenue at the end of the period. On April 29, 1997, the Board of Directors of Symantec authorized the repurchase of up to 1,000,000 shares of Symantec common stock by June 13, 1997. As of June 13, 1997, management completed the repurchase of 500,000 shares at prices ranging from $16.57 to $17.00 per share. 18
19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED The Company has a $10 million line of credit that expires in March 1998. The Company was in compliance with the debt covenants at June 30, 1997. At June 30, 1997, there were no borrowings outstanding under this line and there were less than $1 million of standby letters of credit outstanding under this agreement. Future acquisitions by the Company may cause the Company to be in violation of the line of credit covenants; however, the Company believes that if the line of credit were canceled or amounts were not available under the line, there would not be a material adverse impact on the financial results, liquidity or capital resources of the Company. If Symantec were to sustain significant losses, the Company could be required to reduce operating expenses, which could result in product delays, reassessment of acquisition opportunities, which could negatively impact the Company's growth objectives, and/or pursue further financing options. The Company believes existing cash and short-term investments will be sufficient to fund operations for the next year. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 19
20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information with respect to this item is incorporated by reference to Note 6 of Notes to Consolidated Financial Statements included herein on page 8 of this Form 10-Q. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of, or incorporated by reference into, this Form 10-Q: 11.01 Computation of Net Income Per Share 27.01 Financial Data Schedule (b) Reports on Form 8-K None ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 20
21 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 18, 1997 SYMANTEC CORPORATION By /s/ Howard A. Bain III -------------------------------------- Howard A. Bain III Executive Vice President/Worldwide Operations and Chief Financial Officer (duly authorized officer) /s/ Ronald W. Kisling -------------------------------------- Ronald W. Kisling Vice President Controller and Chief Accounting Officer 21
22 EXHIBIT INDEX --------------- Exhibits Description 11.01 Computation of Net Income Per Share 27.01 Financial Data Schedule 22