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 JANUARY 2, 1998. 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 2,504,185 shares of Delrina exchangeable stock, as of January 23, 1998: COMMON STOCK, PAR VALUE $0.01 PER SHARE 56,576,453 SHARES ================================================================================
2 SYMANTEC CORPORATION FORM 10-Q QUARTERLY PERIOD ENDED JANUARY 2, 1998 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> Page ---- <S> <C> Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 1997 and March 31, 1997......................................... 3 Consolidated Statements of Income for the three and nine months ended December 31, 1997 and 1996..................... 4 Consolidated Statements of Cash Flow for the nine months ended December 31, 1997 and 1996............................... 5 Notes to Consolidated Financial Statements.............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 12 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 </TABLE>
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SYMANTEC CORPORATION CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> December 31, March 31, (In thousands) 1997 1997 --------- --------- ASSETS (unaudited) <S> <C> <C> Current assets: Cash and short-term investments $ 183,898 $ 160,082 Trade accounts receivable 64,765 47,650 Inventories 3,920 4,476 Deferred income taxes 12,642 12,823 Other 17,709 13,166 --------- --------- Total current assets 282,934 238,197 Long-term investments 34,552 -- Capitalized software 1,387 2,037 Equipment and leasehold improvements 50,239 51,610 Restricted investments 55,074 47,448 Other 2,697 2,381 --------- --------- $ 426,883 $ 341,673 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 33,999 $ 30,328 Accrued compensation and benefits 19,327 16,241 Other accrued expenses 62,961 53,742 Income taxes payable 18,692 8,276 Current portion of long-term obligations 7 41 --------- --------- Total current liabilities 134,986 108,628 Convertible subordinated debentures 14,284 15,000 Long-term obligations -- 66 Commitments and contingencies Stockholders' equity: Preferred stock (authorized: 1,000 shares; issued and outstanding: none) -- -- Common stock (authorized: 100,000; issued and outstanding: 56,456 and 55,427 shares) 565 554 Capital in excess of par value 294,711 291,548 Notes receivable from stockholders (144) (144) Cumulative translation adjustment (12,071) (7,580) Accumulated deficit (5,448) (66,399) --------- --------- Total stockholders' equity 277,613 217,979 --------- --------- $ 426,883 $ 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 Nine Months Ended December 31, December 31, -------------------------- -------------------------- (In thousands, except per 1997 1996 1997 1996 share data; unaudited) --------- --------- --------- --------- <S> <C> <C> <C> <C> Net revenues $ 148,240 $ 124,081 $ 422,269 $ 342,477 Cost of revenues 22,591 21,976 65,900 64,190 --------- --------- --------- --------- Gross margin 125,649 102,105 356,369 278,287 Operating expenses: Research and development 21,907 21,002 67,079 64,843 Sales and marketing 68,161 57,495 191,095 164,241 General and administrative 9,505 8,858 27,563 23,951 Acquisition, restructuring and other expenses -- -- -- 8,585 --------- --------- --------- --------- Total operating expenses 99,573 87,355 285,737 261,620 --------- --------- --------- --------- Operating income 26,076 14,750 70,632 16,667 Interest income 3,290 1,556 9,458 4,991 Interest expense (318) (352) (897) (1,020) Other income, net 67 343 721 11 --------- --------- --------- --------- Income before income taxes 29,115 16,297 79,914 20,649 Provision for income taxes 7,279 2,445 18,963 2,880 --------- --------- --------- --------- Net income $ 21,836 $ 13,852 $ 60,951 $ 17,769 ========= ========= ========= ========= Net income per share - basic $ 0.39 $ 0.25 $ 1.09 $ 0.33 ========= ========= ========= ========= Net income per share - diluted $ 0.37 $ 0.25 $ 1.02 $ 0.32 ========= ========= ========= ========= Shares used to compute net income per share - basic 56,277 54,814 55,891 54,501 ========= ========= ========= ========= Shares used to compute net income per share - diluted 60,100 56,659 59,991 55,164 ========= ========= ========= ========= </TABLE> The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4
5 <TABLE> <CAPTION> Nine Months Ended December 31, -------------------------- (In thousands; unaudited) 1997 1996 --------- --------- <S> <C> <C> Operating Activities: Net income $ 60,951 $ 17,769 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of equipment and leasehold improvements 19,075 18,331 Amortization and write-off of capitalized software costs 1,137 3,277 Write-off of equipment and leasehold improvements 1,382 3,083 Deferred income taxes 65 1,730 Net change in assets and liabilities: Trade accounts receivable (18,955) 8,956 Inventories 388 2,911 Other current assets (4,909) 2,969 Capitalized software costs 26 (7,660) Other assets (398) 2,650 Accounts payable 4,875 2,322 Accrued compensation and benefits 3,257 3,147 Other accrued expenses 9,875 8,566 Income taxes payable 10,696 (182) --------- --------- Net cash provided by operating activities 87,465 67,869 --------- --------- Investing Activities: Capital expenditures (20,148) (22,742) Purchased intangibles (554) (310) Purchases of marketable securities (176,927) (140,000) Proceeds from sales of marketable securities 129,526 150,497 Purchases of restricted investments (7,626) (47,262) --------- --------- Net cash used in investing activities (75,729) (59,817) --------- --------- Financing Activities: Repurchase of Company's common stock (21,346) -- Net proceeds from sales of common stock and other 23,707 5,430 --------- --------- Net cash provided by financing activities 2,361 5,430 Effect of exchange rate fluctuations on cash and cash equivalents (3,130) 1,253 --------- --------- Increase in cash and cash equivalents 10,967 14,735 Beginning cash and cash equivalents 95,758 41,777 --------- --------- Ending cash and cash equivalents $ 106,725 $ 56,512 ========= ========= </TABLE> The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5
6 SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The consolidated financial statements of Symantec Corporation ("Symantec" or the "Company") as of December 31, 1997 and for the three and nine months ended December 31, 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 28, 1997. The results of operations for the three and nine months ended December 31, 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 December 31, 1997, March 31, 1997 and December 31, 1996 reflect amounts as of and for the periods ended January 2, 1998, March 28, 1997 and December 27, 1996, respectively. The June 30, 1997 quarter comprised 14 weeks of operations, 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> December 31, March 31, (In thousands) 1997 1997 --------- --------- (unaudited) <S> <C> <C> Cash and short-term investments: Cash $ 34,537 $ 33,755 Cash equivalents 72,188 62,003 Short-term investments 77,173 64,324 --------- --------- $ 183,898 $ 160,082 ========= ========= Trade accounts receivable: Receivables $ 69,104 $ 51,950 Less: allowance for doubtful accounts (4,339) (4,300) --------- --------- $ 64,765 $ 47,650 ========= ========= Inventories: Raw materials $ 1,809 $ 1,736 Finished goods 2,111 2,740 --------- --------- $ 3,920 $ 4,476 ========= ========= Equipment and leasehold improvements: Computer equipment $ 102,732 $ 91,533 Office furniture and equipment 29,171 27,706 Leasehold improvements 20,774 17,697 --------- --------- 152,677 136,936 Less: accumulated depreciation and amortization (102,438) (85,326) --------- --------- $ 50,239 $ 51,610 ========= ========= Capitalized software: Purchased product rights $ 966 $ 591 Capitalized software costs 2,406 2,465 Less: accumulated amortization of purchased product rights (458) (55) Less: accumulated amortization of capitalized software costs (1,527) (964) --------- --------- $ 1,387 $ 2,037 ========= ========= Other accrued expenses: Deferred revenue $ 24,906 $ 13,825 Marketing development funds 12,686 12,529 Other 25,369 27,388 --------- --------- $ 62,961 $ 53,742 ========= ========= </TABLE> 7
8 SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 3. ACQUISITION, RESTRUCTURING AND OTHER EXPENSES Acquisition, restructuring and other expenses consisted of the following: <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, ------------------------------- ------------------------- (In thousands) 1997 1996 1997 1996 ------------ ------------ ------------ ------ <S> <C> <C> <C> <C> Write off of investment in joint venture $ -- $ -- $ -- $1,750 Write off of in-process research and development costs -- -- -- 3,050 Centralization, restructuring and other -- -- -- 3,185 Fast Track, Inc. acquisition -- -- -- 600 ------------ ------------ ------------ ------ Total acquisition, restructuring and other expenses $ -- $ -- $ -- $8,585 ============ ============ ============ ====== </TABLE> 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 13, 1997, following Symantec's motions directed to previous complaints. On January 7, 1997, the same plaintiffs filed 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 has filed a motion to dismiss the federal complaint, which is under submission with the court. Symantec believes that neither the state court complaint nor the federal court complaint has any merit and will vigorously defend itself against both complaints. 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 of Trio's C-Index code in its Norton Utilities, Norton Your Eyes Only and pcANYWHERE products. The lawsuit was settled on December 19, 1997 on terms that were not material to Symantec. On April 23, 1997, Symantec filed a lawsuit against McAfee Associates, Inc., which pursuant to a merger has become Network Associates, Inc. ("Network Associates"), in the United States District Court, Northern District of California, for copyright infringement and unfair competition. On October 6, 1997, the court found that Symantec had demonstrated a likelihood of success on the merits of certain copyright claims, and issued a preliminary injunction (i) prohibiting Network Associates from infringing Symantec's rights in specified materials by marketing, selling, transferring or directly or indirectly copying into any new Network Associates product or new version of an existing product that has Symantec code, (ii) requiring Network Associates to notify distributors who are still selling versions of PC Medic 97 that have Symantec's code to tell customers that they should upgrade to versions that do not contain Symantec code, and (iii) requiring Network Associates to provide Symantec and the court with a sample of the notice to be used. On October 17, 1997, Symantec amended its complaint to include additional claims for copyright infringement and misappropriation of trade secrets, based on additional evidence found in the discovery process. Symantec continues to investigate the extent to which Network Associates may have misappropriated Symantec's intellectual property, and plans to aggressively pursue its remedies under this lawsuit, which include both injunctive relief and monetary damages. 8
9 SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED On May 13, 1997, Trend Micro Incorporated ("Trend") filed a lawsuit in the United States District Court, Northern District of California, against Symantec Corporation and Network Associates, alleging patent infringement. Trend claims that Norton AntiVirus for Internet E-mail Gateways and Norton AntiVirus for Firewalls infringe a patent owned by Trend. 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. On August 22, 1997, Network Associates filed a lawsuit against Symantec in the Superior Court of the State of California, County of Santa Clara, alleging defamation, trade libel, unfair competition and unjust enrichment. The complaint alleged that damages to Network Associates could result in damages of $1 billion. Network Associates dismissed the lawsuit on or about December 30, 1997. On September 15, 1997, Hilgraeve Corporation filed a lawsuit in the United States District Court, Eastern District of Michigan, against Symantec Corporation, alleging that unspecified Symantec products infringe a patent owned by Hilgraeve. 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. On February 4, 1998, CyberMedia, Inc., filed a lawsuit in the United States District Court for the Northern District of California against Symantec Corporation, ZebraSoft Inc., and others, alleging that Symantec Norton Uninstall Deluxe infringes CyberMedia's copyright, and asserting related state law claims. The suit requests damages, injunctive relief, costs and attorneys fees. Symantec believes this claim has no merit and intends to defend the action vigorously. Over the past few years, it has become common for software companies, including Symantec, to receive claims of patent infringement. Symantec is currently evaluating claims of patent infringement asserted by several parties, including 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 results of operations and financial condition 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. The Company has accrued certain estimated legal fees and expenses related to certain of these matters; however, actual amounts may differ materially from those estimated amounts. NOTE 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. Additionally, on November 24, 1997, the Board of Directors of Symantec authorized the repurchase of up to 500,000 shares of Symantec common stock. As of December 4, 1997 management completed the repurchase of 500,000 shares at prices ranging from $25.25 to $26.81 per share. 9
10 SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 6. EARNINGS PER SHARE 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. As a result, the Company has changed the method used to compute earnings per share and has restated all prior periods. <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, --------------------- --------------------- (In thousands, except per share data) 1997 1996 1997 1996 ------- ------- ------- ------- <S> <C> <C> <C> <C> BASIC NET INCOME PER SHARE Net income $21,836 $13,852 $60,951 $17,769 ======= ======= ======= ======= Weighted average number of common shares outstanding during the period 56,277 54,814 55,891 54,501 ======= ======= ======= ======= Basic net income per share $ .39 $ .25 $ 1.09 $ .33 ======= ======= ======= ======= DILUTED NET INCOME PER SHARE Net income $21,836 $13,852 $60,951 $17,769 Interest on convertible subordinated debentures, net of income tax effect 169 177 523 -- ------- ------- ------- ------- Net income, as adjusted $22,005 $14,029 $61,474 $17,769 ======= ======= ======= ======= Weighted average number of common shares outstanding during the period 56,277 54,814 55,891 54,501 Shares issuable from assumed exercise of options 2,633 595 2,870 663 Shares issuable from assumed conversion of convertible subordinated debentures 1,190 1,250 1,230 -- ------- ------- ------- ------- Total shares for purpose of calculating diluted net income per share 60,100 56,659 59,991 55,164 ======= ======= ======= ======= Diluted net income per share $ .37 $ .25 $ 1.02 $ .32 ======= ======= ======= ======= </TABLE> For the nine months ended December 31, 1996, 1,250,000 shares of convertible subordinated debentures and $531,000 of interest expense were excluded from the computation of diluted net income per share because the effect would be antidilutive. NOTE 7. PARTIAL CONVERSION OF OUTSTANDING CONVERTIBLE SUBORDINATED DEBENTURES During October 1997, a holder of Symantec's Convertible Subordinated Debentures converted $716,000 principal amount of such debentures into 59,666 shares of Symantec Common Stock. The conversion of these shares of Common Stock were issued in a transaction which was exempt from registration under the Securities Act of 1933. 10
11 SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 8. DERIVATIVE FINANCIAL INSTRUMENT ACCOUNTING POLICY In January 1997, the Securities and Exchange Commission issued new disclosure rules related to derivatives and exposures to market risk from derivative financial instruments. These new disclosure rules have two parts. A requirement for market risk disclosures (both quantitative and qualitative) outside the financial statements and a requirement for expanded accounting policy disclosures for derivatives in the notes to the financial statements. These disclosures will be required to be adopted by Symantec beginning in fiscal year-end 1999 and the September 1997 quarter, respectively. Management is currently evaluating the implication of the required market risk disclosures (both quantitative and qualitative) outside the financial statements. The expanded accounting policy disclosure for derivatives is as follows: Symantec utilizes natural hedging to mitigate the Company's transaction exposures and hedges residual transaction exposures through the use of one-month foreign exchange forward contracts. The Company enters into foreign exchange forward contracts with financial institutions primarily to minimize currency exchange risks associated with certain firmly committed transactions. All foreign exchange forward contracts are designated effective as a hedge and are highly correlated to the hedged item as required by generally accepted accounting principles. Gains and losses on the contracts are included in other income (loss) in the same period as gains and losses on the underlying transactions are recognized and generally offset. Gains and losses on any instruments not meeting the criteria as a hedge would be recognized in other income (loss) in the current period. If an underlying hedged transaction is terminated earlier than initially anticipated, the offsetting gain or loss on the related derivative instrument is recognized in other income (loss) in the same period. The fair value of foreign currency exchange forward contracts approximates cost due to the short maturity periods. NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued 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 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 will be effective for Symantec for fiscal 1999 and will apply to both annual and interim financial reporting subsequent to this date. Symantec is evaluating the potential impact of these accounting pronouncements on required disclosures. SFAS 130 and SFAS 131 will not have a material impact on the financial condition or results of operations of the Company. In October 1997, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition," which provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and is effective for Symantec's transactions entered into subsequent to April 3, 1998. Based upon Symantec's reading and interpretation of SOP 97-2, the Company does not believe that the implementation of SOP 97-2 will have a material adverse affect on expected revenues or earnings. However, detailed implementation guidelines for this standard have not yet been issued. Once issued, such detailed guidance could lead to unanticipated changes in the Company's current revenue accounting practices and material adverse changes in the Company's reported revenues and earnings. In the event implementation guidance is contrary to the Company's revenue accounting practices, the Company believes it can change its current business practices to comply with this guidance and avoid any material adverse effect on reported revenues and earnings. However, there can be no assurance this will be the case. 11
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Accordingly, all references as of and for the periods ended December 31, 1997, March 31, 1997 and December 31, 1996 reflect amounts as of and for the periods ended January 2, 1998, March 28, 1997 and December 27, 1996, respectively. The June 30, 1997 quarter comprised 14 weeks of operations, while the comparable prior year period comprised 13 weeks. 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 28, 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. 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. 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. 12
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED 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 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. 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 limited 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. ACQUIRED COMPANIES. 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 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. Future acquisitions 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 operating expenses 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 and economic volatility. 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. 13
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED QUARTERLY BUYING PATTERNS: ABSENCE OF BACKLOG. Most 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 is particulary true of large corporate customers that negotiate large site licenses near the end of each quarter. 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 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. DISTRIBUTION CHANNELS. The Company's retail distribution customers also carry the products of Symantec's competitors. These 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 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 effective distribution 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. 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. 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. 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. 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. 14
15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Channel fill did not have a material impact on the Company's revenues in the June, September, and December quarters 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 product inventory levels in the channel, and takes into consideration upcoming product upgrades, current market conditions and any other known factors when estimating anticipated product 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, 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. 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. 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. 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. 15
16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Should the Company be unable to successfully or timely develop products that operate under existing or new operating systems, or should the functionality of such operating systems reduce the need for Symantec's products, 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' or investors' 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 a number of 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. 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 a number of 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 (See Note 4 of Notes to Consolidated Financial Statements). 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 sales and marketing efforts will be successful. 16
17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED 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. 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 which requires ongoing stockholder approval. YEAR 2000. The Company, in conjunction with outside consultants, has completed an assessment of its computer systems and software and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The scope of the assessment includes the Company's interface systems with significant suppliers and other third parties; however, there can be no guarantee that the systems of other companies with which Symantec does business will be timely converted and will not have an adverse effect on Symantec's systems. In addition, there can be no assurance that the systems of all the companies with which Symantec does business will be timely converted, and as a result, there could be disruption in business transactions with the Symantec's suppliers and customers. Certain of Symantec's products have been tested and validated as Year 2000 compliant. The year 2000 project cost is not expected to be material. The project is estimated to be significantly completed during the 1998 calendar year, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material adverse impact on the operations of the Company. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, unforeseen circumstances causing the Company to allocate its resources elsewhere, and similar uncertainties. Additionally, as testing of Year 2000 functionality of the Company's systems must occur in a simulated environment, the Company will not be able to test full system Year 2000 interfaces and capabilities prior to Year 2000. The Company believes that its exposure on Year 2000 issues is not material to its business as a whole. 17
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED RESULTS OF OPERATIONS The following table sets forth each item from the 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. <TABLE> <CAPTION> Three Months Percent Nine Months Percent Ended Change Ended Change December 31, in Dollar December 31, in Dollar ------------------ ------------------ 1997 1996 Amounts 1997 1996 Amounts ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Net revenues................................... 100% 100% 19% 100% 100% 23% Cost of revenues............................... 15 18 3 16 19 3 ------- ------- ------- ------- Gross margin............................ 85 82 23 84 81 28 Operating expenses: Research and development.................. 15 17 4 16 19 3 Sales and marketing....................... 46 46 19 45 48 16 General and administrative................ 6 7 7 6 7 15 Acquisition, restructuring and other expenses.......................... -- -- 0 -- 2 (100) ------- ------- ------- ------- Total operating expenses................ 67 70 14 67 76 9 ------- ------- ------- ------- Operating income............................... 18 12 77 17 5 324 Interest income................................ 2 1 111 2 1 90 Interest expense............................... -- -- (10) -- -- (12) Other income (expense), net.................... -- -- (80) -- -- 6,455 ------- ------- ------- ------- Income before income taxes.................... 20 13 79 19 6 287 Provision for income taxes .................... 5 2 198 5 1 558 ------- ------- ------- ------- Net income .................................... 15% 11% 58 14% 5% 243 ======= ======= ======= ======= </TABLE> NET REVENUES. Net revenues increased 19% from $124 million in the quarter ended December 31, 1996 to $148 million in the quarter ended December 31, 1997. Net revenues increased 23% from $342 million for the nine month period ended December 31, 1996 to $422 million for the nine month period ended December 31, 1997. During the comparative three and nine month periods ended December 31, 1997 and 1996, Symantec experienced increased net revenues from its Security and Assistance and Remote Productivity Solutions business units. The Security and Assistance business unit is dedicated to being indispensable to customers' daily use of computers by increasing productivity and keeping computers safe and reliable. Increased net revenues for the comparable three month December periods were primarily related to sales of Norton Utilities for Windows 95 version 3.0 and a new product, Norton Uninstaller. Increased net revenues for the comparable nine month December periods were primarily related to Windows 95, Windows NT and Macintosh versions of Norton Utilities, Norton AntiVirus for multi-platform workstations/servers, and Norton Uninstaller. Net revenues from the Security and Assistance business unit comprised approximately 50% of net revenues for the December 1997 and 1996 three and nine month periods. 18
19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED 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 for both the comparable three and nine month December periods primarily resulted from increased sales of pcANYWHERE for Windows 95 and WinFax Pro for Windows 95. Net revenues from the Remote Productivity Solutions group comprised approximately 40% of the Company's net revenues for the December 1997 three and nine month periods, compared to 35% for the December 1996 three and nine month periods. The remaining 10% of the Company's revenue for the December 1997 three and nine month periods and 15% of net revenue for the December 1996 three and nine months periods include product revenues related to development tools for Java applications, royalty and revenue streams from the sale of certain of Symantec's software product lines offset by decreases in revenues from products nearing the end of their life cycles. A majority of this revenue for the three and nine month periods ended December 31, 1997 is comprised of payments and royalty streams related to the sale of certain 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 28, 1997, Consolidated Financial Statements, Note 9 - Sale of Product Rights. Net revenues from international sales were approximately $51 million and $38 million and represented 34% and 31% of total net revenues in the December 1997 and 1996 quarters, respectively. Net revenues between comparable December quarters increased by 34% in Europe, 32% in Asia Pacific, 35% in Japan and 61% in Latin America. During the current fiscal year, the Company has increased its sales and marketing presence and number of localized products in the Asia Pacific and Latin America regions. Net revenues from international sales were approximately $132 million and $103 million in the nine month periods ended December 31, 1997 and 1996, respectively, and represented approximately 31% and 30% of total net revenues in the nine month periods ended December 31, 1997 and 1996, respectively. Symantec's revenues were not materially impacted by recent currency fluctuations. The Company does not currently expect business conditions in the Asia Pacific region to have a material adverse affect on its results of operations. GROSS MARGIN. Gross margin represents net revenues less cost of revenues. Cost of revenues consists primarily of direct materials, manufacturing expenses, royalties paid to third party developers under licensing agreements and amortization and write-off of capitalized software. Gross margins were 85% and 82% for the three month periods ended December 31, 1997 and 1996, respectively, and 84% and 81% for the nine month periods ended December 31, 1997 and 1996, respectively. Factors contributing to an increase in gross margin percentage during the three and nine month periods ended December 31, 1997 include reduction of direct material costs by shifting product media format from diskettes to CD ROM on certain products, reduction in manufacturing overhead costs due to improved economies of scale, and reduction in software amortization expense due to the write-off of a significant portion of Symantec's capitalized software development costs during the March 1997 quarter. Additionally, total revenues received by Symantec from JetForm and Hewlett-Packard during the three and nine month periods ended December 31, 1997 increased from total revenues received from JetForm and miscellaneous software development services during the three and nine month periods ended December 31, 1996. These increased revenues contributed to increases in gross margin for the comparable periods as there were minimal costs associated with these revenue streams. 19
20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses totaled approximately $22 million or 15% of net revenues in the quarter ended December 31, 1997 and approximately $21 million or 17% of net revenues in the quarter ended December 31, 1996. Research and development expenses totaled approximately $67 million or 16% of net revenues for the nine month period ended December 31, 1997 and approximately $65 million or 19% of net revenues in the nine month period ended December 31, 1996. Research and development expenditures are generally charged to operations as incurred. The decrease in research and development expenses as a percentage of net revenue was the largely the result of the elimination of research and development efforts related to the Networking Business Unit, which was sold to Hewlett-Packard during the March 1997 quarter, which was partially offset by increases in new product development efforts. During the three and nine month periods ended December 31, 1996, Symantec's research and development costs were reduced by the capitalization of approximately $2 million and $8 million of software development costs, respectively, 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, accounting standards related to capitalization of software development costs did not materially affect the Company. SALES AND MARKETING EXPENSES. Sales and marketing expenses totaled approximately $68 million or 46% of net revenues in the quarter ended December 31, 1997 and approximately $57 million or 46% of net revenues in the quarter ended December 31, 1996. Sales and marketing expenses totaled approximately $191 million or 45% of net revenues for the nine month period ended December 31, 1997 and approximately $164 million or 48% of net revenues in the quarter ended December 31, 1996. The increase in sales and marketing expense between the comparable three and nine month December periods is primarily related to increased sales and marketing activities in the Europe, Asia Pacific and Japan regions, as well as new product releases and upgrade launches. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to approximately $10 million and $28 million in the three and nine month periods ended December 31, 1997, respectively, from approximately $9 million and $24 million in the three and nine month periods ended December 31, 1996, respectively. General and administrative expenses were approximately 6% and 7% of net revenues for the three month periods ended December 31, 1997 and 1996, respectively, and approximately 6% and 7% for the nine month periods ending December 31, 1997 and 1996, respectively. The absolute dollar increase in these expenses related to increased business activities for the three and nine month comparable December 1997 and 1996 periods. ACQUISITION, RESTRUCTURING AND OTHER EXPENSES. There were no acquisition, restructuring or other expenses recorded during the three and nine month periods ended December 31, 1997. During the nine month period ended December 31, 1996, Symantec recorded approximately $9 million of acquisition charges, including the approximately $2 million write off of an investment in a joint venture, approximately $3 million charge in connection with the acquisition of certain in process software development technology and approximately $4 million for costs related to the restructuring and centralization of certain operations and other non-recurring expenses. 20
21 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 approximately $3 million and $2 million in the quarters ended December 31, 1997 and 1996, respectively, and $9 million and $5 million for the nine months ended December 31, 1997 and 1996, respectively. The increase in interest income for the three and nine month periods is due to higher average invested cash balances. Interest expense was $0.3 million and $0.4 million in the quarters ended December 31, 1997 and 1996, respectively, and $0.9 million and $1.0 million for the nine months ended December 31, 1997 and 1996, respectively. Interest expense is principally related to Symantec's 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 natural hedging to mitigate Symantec's transaction exposures and hedges certain residual transaction exposures through the use of one-month forward contracts. There were no significant gains or losses for the quarter ended December 31, 1997 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 nine months ended December 31, 1997 was approximately 24%, which is lower than the U.S. federal statutory tax rate due primarily to a lower tax rate from the Company's Irish operations and to the utilization of previously unbenefitted net operating losses and tax credits. Symantec expects that the effective tax rate will increase in future periods after the Company has utilized its previously unbenefitted net operating losses and tax credits. The effective tax provision for the nine months ended December 31, 1996 was approximately 14%. LIQUIDITY AND CAPITAL RESOURCES Cash, short-term investments and long-term investments increased $58 million to approximately $218 million at December 31, 1997 from approximately $160 million at March 31, 1997. This increase was largely due to cash provided from operating activities and net proceeds from the exercise of stock options and the sales of common stock under the Employee Stock Purchase Plan and Stock Option Plans. In addition to cash, short-term investments and long-term investments of $218 million, the Company has $55 million of restricted investments related 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 securities with weighted average maturity not to exceed two 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 $87 million and was comprised of the Company's net income of $61 million and non-cash related expenses of $21 million and a net decrease in assets and liabilities of $5 million. 21
22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Trade accounts receivable increased $17 million from approximately $48 million at March 31, 1997 to approximately $65 million at December 31, 1997 primarily due to new product releases and strong sales during the December 1997 quarter, particularly European sales during the last two weeks of the quarter. 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. On November 24, 1997, the Board of Directors of Symantec authorized the repurchase of up to 500,000 shares of Symantec common stock. As of December 4, 1997 management completed the repurchase of 500,000 shares at prices ranging from $25.25 to $26.81 per share. The Company has a $10 million line of credit that expires in March 1998. The Company was in compliance with the debt covenants at December 31, 1997. At December 31, 1997, there were no borrowings outstanding under this line and there were approximately $0.2 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. 22
23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 23
24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information with respect to this item is incorporated by reference to Note 4 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: 27.01Financial Data Schedule (b) Reports on Form 8-K None ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 24
25 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: February 13, 1998 SYMANTEC CORPORATION By [s] Howard A. Bain III ------------------------------------------ Howard A. Bain III 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 25