- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 DECEMBER 27, 1996. 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 3,930,768 shares of Delrina exchangeable stock, as of January 24, 1997: COMMON STOCK, PAR VALUE $0.01 PER SHARE 55,273,196 SHARES - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
SYMANTEC CORPORATION FORM 10-Q QUARTERLY PERIOD ENDED DECEMBER 27, 1996 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996 . . . . . . . . . 3 Consolidated Statements of Operations for the three and nine months ended December 31, 1996 and 1995 4 Consolidated Statements of Cash Flow for the nine months ended December 31, 1996 and 1995 . . . . 5 Notes to Consolidated Financial Statements. . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 22 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 22 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SYMANTEC CORPORATION CONSOLIDATED BALANCE SHEETS December 31, March 31, (In thousands) 1996 1996 - -------------- ------------ --------- ASSETS (unaudited) Current assets: Cash and short-term investments $ 133,438 $ 129,199 Trade accounts receivable 74,752 72,256 Inventories 5,090 7,893 Deferred income taxes 11,140 12,875 Other 11,691 14,639 ---------- ---------- Total current assets 236,111 236,862 Equipment and leasehold improvements 53,088 51,698 Restricted investments 47,262 -- Capitalized software 8,871 4,183 Other 2,502 5,186 ---------- ---------- $ 347,834 $ 297,929 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 25,973 $ 23,368 Accrued compensation and benefits 18,031 14,888 Other accrued expenses 80,022 60,566 Income taxes payable 3,237 3,329 Current portion of long-term obligations 19 68 ---------- --------- Total current liabilities 127,282 102,219 Convertible subordinated debentures 15,000 15,000 Long-term obligations 228 393 Stockholders' equity: Preferred stock (authorized: 1,000 shares; issued and outstanding: none) -- -- Common stock (authorized: 100,000; issued and outstanding: 54,889 and 53,636 shares) 549 536 Capital in excess of par value 285,584 279,508 Notes receivable from stockholders (144) (144) Cumulative translation adjustment (5,994) (7,591) Accumulated deficit (74,671) (91,992) ---------- ---------- Total stockholders' equity 205,324 180,317 ---------- ---------- $ 347,834 $ 297,929 ---------- ---------- ---------- ---------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3
SYMANTEC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> Three Months Ended Nine Months Ended December 31, December 31, --------------------- ----------------------- (In thousands, except per share data; unaudited) 1996 1995 1995 1996 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net revenues $124,081 $111,097 $342,477 $329,472 Cost of revenues 21,976 31,070 64,190 88,378 -------- -------- -------- -------- Gross margin 102,105 80,027 278,287 241,094 Operating expenses: Research and development 21,002 26,334 64,843 70,202 Sales and marketing 57,495 60,159 164,241 172,818 General and administrative 8,858 6,275 23,951 27,163 Acquisition, restructuring and other expenses -- 25,688 8,585 25,617 -------- -------- -------- -------- Total operating expenses 87,355 118,456 261,620 295,800 -------- -------- -------- -------- Operating income (loss) 14,750 (38,429) 16,667 (54,706) Interest income 1,556 1,745 4,991 5,929 Interest expense (352) (338) (1,020) (1,121) Other income (expense), net 343 216 11 (2,437) -------- -------- -------- -------- Income (loss) before income taxes 16,297 (36,806) 20,649 (52,335) Provision (benefit) for income taxes 2,445 -- 2,880 (4,609) -------- -------- -------- -------- Net income (loss) $ 13,852 (36,806) $ 17,769 $(47,726) -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share $ 0.25 $ (0.69) $ 0.32 $ (0.91) -------- -------- -------- -------- -------- -------- -------- -------- Shares used to compute net income (loss) per share 55,409 53,107 55,164 52,391 -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4
SYMANTEC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW <TABLE> Nine Months Ended December 31, (In thousands; unaudited) 1996 1995 - ------------------------- --------- --------- <S> <C> <C> OPERATING ACTIVITIES: Net income (loss) $ 17,769 $ (47,726) Delrina net loss for the quarter ended June 30, 1995 -- 4,834 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of equipment and leasehold improvements 18,331 19,856 Amortization and write-off of capitalized software costs 3,277 16,516 Write-off of equipment and leasehold improvements 3,083 -- Deferred income taxes 1,730 (1,487) Net change in assets and liabilities: Trade accounts receivable (1,206) 2,306 Inventories 2,911 993 Other current assets 2,943 (3,840) Capitalized software costs (7,660) (1,299) Other assets 2,650 2,068 Accounts payable 2,322 (429) Accrued compensation and benefits 3,147 (854) Accrued other expenses 18,754 9,140 Income taxes payable (182) (188) --------- --------- Net cash provided by operating activities 67,869 (110) --------- --------- INVESTING ACTIVITIES: Capital expenditures (22,742) (28,273) Purchased product rights (310) (744) Purchases of short-term, available-for-sale investments (140,000) (104,500) Maturities of short-term, available-for-sale investments 150,497 118,411 Purchases of restricted investments (47,262) -- --------- --------- Net cash used in investing activities (59,817) (15,106) --------- --------- FINANCING ACTIVITIES: Principal payments on long-term obligations (214) (119) Net proceeds from sales of common stock and other 5,644 19,573 --------- --------- Net cash provided by financing activities 5,430 19,454 Effect of exchange rate fluctuations on cash and cash equivalents 1,253 87 --------- --------- Increase in cash and cash equivalents 14,735 4,325 Beginning cash and cash equivalents 41,777 30,192 --------- --------- Ending cash and cash equivalents $ 56,512 $ 34,517 --------- --------- --------- --------- </TABLE> The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5
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, 1996 and for the three and nine months ended December 31, 1996 and 1995 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, 1996. The results of operations for the three and nine months ended December 31, 1996 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, 1996, March 31, 1996 and December 31, 1995 reflect amounts as of and for the periods ended December 27, 1996, March 29, 1996 and December 29, 1995, respectively. Research and development expenditures are charged to operations as incurred. During the December 1996 quarter, the Company capitalized approximately $2.4 million of costs principally associated with the development of certain networking software products in accordance with Statement of Financial Accounting Standard No. 86. To the extent the Company capitalizes its product development costs, the effect is to defer such costs to future periods and match those costs to the revenue generated by the developed products. Amounts capitalized may fluctuate depending in part on the number and status of internal software development projects. 6
SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued NOTE 2. BALANCE SHEET INFORMATION December 31, March 31, (In thousands) 1996 1996 - -------------- ------------ ---------- (unaudited) Cash and short-term investments: Cash $ 32,741 $ 20,176 Cash equivalents 23,771 21,601 Short-term investments 76,926 87,422 --------- --------- $ 133,438 $ 129,199 --------- --------- --------- --------- Trade accounts receivable: Receivables $ 78,923 $ 77,272 Less: allowance for doubtful accounts (4,171) (5,016) --------- --------- $ 74,752 $ 72,256 --------- --------- --------- --------- Inventories: Raw materials $ 1,941 $ 1,969 Finished goods 3,149 5,924 --------- --------- $ 5,090 $ 7,893 --------- --------- --------- --------- Equipment and leasehold improvements: Computer equipment $ 91,428 $ 79,153 Office furniture and equipment 27,412 25,753 Leasehold improvements 17,077 12,603 --------- --------- 135,917 117,509 Less: accumulated depreciation and amortization (82,829) (65,811) --------- --------- $ 53,088 $ 51,698 --------- --------- --------- --------- Capitalized software: Purchased product rights $ 7,607 $ 8,680 Capitalized software costs 12,941 5,623 Less: accumulated amortization of purchased product rights (7,435) (8,162) Less: accumulated amortization of capitalized software costs (4,242) (1,958) --------- --------- $ 8,871 $ 4,183 --------- --------- --------- --------- Other accrued expenses: Acquisition, restructuring and other expenses $ 4,110 $ 7,833 Deferred revenue 38,285 26,266 Marketing development funds 14,734 11,412 Other 22,893 15,055 --------- --------- $ 80,022 $ 60,566 --------- --------- --------- --------- NOTE 3. LINE OF CREDIT The Company has a $10.0 million bank line of credit that expires in March 1998. There were no borrowings outstanding at December 31, 1996. The Company was in compliance with the line of credit covenants as of December 31, 1996. At December 31, 1996, there was approximately $0.4 million of standby letters of credit outstanding under this line of credit. 7
SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued NOTE 4. ACQUISITION, RESTRUCTURING AND OTHER EXPENSES Acquisition, restructuring and other expenses consisted of the following: <TABLE> Three Months Ended Nine Months Ended December 31, December 31, --------------------- --------------------- (In thousands) 1996 1995 1996 1995 - ----------------------- -------- -------- -------- --------- <S> <C> <C> <C> <C> Write off of investment in joint venture $ -- $ -- $ 1,750 $ -- Write off of acquired in-process research and development costs -- -- 3,050 -- Centralization and restructuring and other costs -- -- 3,185 -- Fast Track, Inc. acquisition expenses -- -- 600 -- Delrina Corporation acquisition expenses -- 22,000 -- 22,000 Loss on sale of subsidiary and other costs -- 3,688 -- 3,688 Consolidation expenses for certain research and development activities -- -- -- 2,229 Central Point acquisition expenses -- -- -- (2,300) ------- ------- ------- -------- Total acquisition, restructuring and other expenses $ -- $25,688 $ 8,585 $ 25,617 ------- ------- ------- -------- ------- ------- ------- -------- </TABLE> During November 1995, Symantec completed its acquisition of Delrina Corporation ("Delrina"), recording total acquisition charges of $22.0 million. During the December 1995 quarter, Symantec incurred a $3.7 million charge related to the sale of certain assets and liabilities of a subsidiary of the Company and other expenses. During the quarter ended September 30, 1996, Symantec recorded a $1.8 million charge in connection with the write off of an investment in a joint venture and a $3.1 million charge for the write off of certain in-process research and development costs acquired by the Company. Additionally, during the nine months ended December 31, 1996, the Company recorded a charge of $3.2 million for costs related to the restructuring of certain domestic and international sales and research and development operations, settlement of the Carmel lawsuit (see Note 6) and other expenses. The restructuring plans should be substantially completed during fiscal 1997. Symantec recorded total acquisition charges of $0.6 million in the quarter ended June 30, 1996 in connection with the acquisition of Fast Track, Inc. During the quarter ended June 30, 1995, the Company incurred $2.2 million to consolidate certain research and development activities. This consolidation has been completed. In the quarter ended June 30, 1995, the Company recognized a reduction in accrued acquisition and restructuring expenses related to the acquisition of Central Point Software, Inc. ("Central Point") of $2.3 million, as actual restructuring costs incurred were less than costs previously accrued by Central Point. As of December 31, 1996, total remaining accrued acquisition, restructuring and other expenses were $4.1 million and included $0.6 million for legal, accounting and financial advisory services, $2.6 million for the elimination of duplicative and excess facilities, and $0.9 million for the consolidation and discontinuance of certain operational activities and other acquisition related expenses. NOTE 5. INCOME TAXES Income taxes are computed in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Symantec provides for income taxes during interim reporting periods based upon an estimate of its annual effective tax rate. This estimate reflects U.S. federal, state and foreign income taxes. 8
SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued NOTE 6. 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 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 September 3, 1992, Borland International, Inc. ("Borland") filed a lawsuit in the Superior Court for Santa Cruz County, California against Symantec, Gordon E. Eubanks, Jr. (Symantec's President and Chief Executive Officer) and Eugene Wang (a former Executive Vice President of Symantec who is a former employee of Borland). The complaint, as amended, alleges misappropriation of trade secrets, unfair competition, including breach of contract, interference with prospective economic advantage and unjust enrichment. Borland alleged that prior to joining Symantec, Mr. Wang transmitted to Mr. Eubanks confidential information concerning Borland's product and marketing plans. Borland claims damages in an unspecified amount. Symantec has denied the allegations of Borland's complaint and contends that Borland has suffered no damages from the alleged actions. Borland obtained a temporary restraining order and a preliminary injunction prohibiting the defendants from using, disseminating or destroying any Borland proprietary information or trade secrets. Symantec filed a cross complaint against Borland alleging that Borland had committed abuse of process and defamation in publishing statements that Symantec had acted in contempt of a temporary restraining order. The case is not being actively prosecuted at this time due to the outcome of the criminal proceedings, discussed below. Symantec believes that Borland's claims have no merit. On September 2, 1992, the Scotts Valley, California police department, operating with search warrants for Borland proprietary and trade secret information, searched Symantec's offices and the homes of Messrs. Eubanks and Wang and removed documents and other materials. On February 26, 1993, criminal indictments were filed against Messrs. Eubanks and Wang for allegedly violating various California Penal Code Sections relating to the misappropriation of trade secrets and unauthorized access to a computer system. On November 19, 1996, the criminal indictments were dismissed at the request of the District Attorney. 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. On July 14, 1992, the Suffolk County, New York sheriff's department conducted a search of EKD's premises and seized and impounded thousands of infringing articles. On July 21, 1992, the Court issued a preliminary injunction against EKD and Mr. Green, enjoining them from manufacturing, marketing, distributing, copying or purporting to license DMA's pcANYWHERE III or using DMA's marks. On July 20, 1992 and in a subsequent amendment, EKD and Mr. Green answered Symantec's complaint denying all liability and asserting counterclaims against Symantec and Lee Rautenberg, a former principal of DMA. In May 1993, EKD and Mr. Green were granted permission to file a Second Amended Answer and Counterclaims that dropped every previously raised claim and instead alleged that DMA obtained the temporary restraining order and preliminary injunction in bad faith and that DMA, Symantec and Mr. Rautenberg breached certain license agreements and violated certain federal and New York State antitrust laws. In February 1995, DMA was granted leave to file an Amended Complaint, which EKD subsequently responded to by a Third Amended Answer and 9
SYMANTEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Counterclaims virtually identical to EKD's Second Amended pleading. Symantec believes the charges made by EKD and Mr. Green have no merit. 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. 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. NOTE 7. LEASE AGREEMENTS In October 1996, Symantec entered into lease agreements for two office buildings in Cupertino, California. The lease agreements are for seven years and the lease payments total approximately $2.6 million per year. Lease payments are based on the three month London Interbank Offering Rate ("LIBOR") in effect at the beginning of each fiscal quarter. Symantec has the right to acquire the related properties at any time during the seven year lease period or may renew the lease. The guaranteed residual payment on the lease agreements totals approximately $38.4 million. Symantec is required to maintain a corresponding investment in U.S. treasury notes with maturities not to exceed three years. Symantec is restricted in use of these investments per the terms of the lease agreement. The investments total $39.3 million and are classified as non- current restricted investments within the financial statements. The Company currently occupies a portion of these office buildings and has assumed the right to sub-lease income provided by the other tenants, which is estimated to be approximately $2.1 million per fiscal year based on current occupancy and rental rates. The sub-lease agreements have terms expiring in January 1997 through September 2000. NOTE 8. SUBSEQUENT EVENT In January 1997, Symantec entered into a lease agreement for land to support future expansion in Cupertino, California. The lease agreement is for seven years and the lease payments total approximately $0.4 million per year. Lease payments are based on the three month LIBOR in effect at the beginning of each fiscal quarter. Symantec has the right to acquire the related property at any time during the seven year lease period or may renew the lease. The guaranteed residual payment on the lease agreement is approximately $7.0 million. Symantec is required to maintain a corresponding investment in U.S. treasury notes with maturities not to exceed three years of $7.1 million. The investments currently are classified as long-term restricted investments within the financial statements. 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 that are subject to significant risks and uncertainties. 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. FACTORS THAT MAY AFFECT FUTURE RESULTS There are several important factors that could cause actual results to differ materially from historical results and percentages and results anticipated by the forward-looking statements contained in the following discussion. Such factors and risks include, but are not limited to, competition in the market for application and network computer software, including price and product feature competition; the introduction of new or upgraded products by existing or new competitors; the economic environment, including corporate spending patterns; dependence on distributors and the emergence of new channels or changes to the current distribution channels, including the Internet; consumer acceptance of new operating systems and the successful development of the Company's products for these operating systems; the timing and consumer acceptance of the Company's new or upgraded products; the ability to successfully develop, market, support and acquire new products in an environment of rapidly changing technology and operating systems and the cost of such activities; acquisition risks, including increased costs and uncertain benefits and the ability to effectively integrate operations of acquired companies and manage growth; seasonality in the retail software markets; and risks associated with international operations, including foreign currency conversion, taxes and other legal restrictions. 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, which has had an immediate and significantly adverse effect on the trading price of the Company's common stock. This may occur again in the future. Furthermore, the Company participates in a highly dynamic industry, which often results in significant volatility of the Company's common stock price. The impact of the market's acceptance and adoption rate of new operating systems on Symantec's business, and investors' assessment thereof, will likely continue to result in significant volatility of Symantec's results and stock price. Also, the Internet has allowed the emergence of new competitors who have extended their product offerings from Internet based distribution to the retail distribution channel. While Symantec's diverse product line has tended to lessen fluctuations in quarterly net revenues, these fluctuations have occurred recently and are likely to occur in the future. These fluctuations may be caused by a number of factors, including the timing of announcements and releases of new or enhanced versions of its products and product upgrades, the introduction of competitive products by existing or new competitors, reduced demand for any given product, seasonality in the retail software market, the market's transition between operating systems and the transition from a desktop PC environment to an enterprise-wide environment. These factors may cause significant fluctuations in net revenues and, accordingly, operating results. The Company has, in the past, and is continuing to devote substantial efforts to the development of software products that operate on Microsoft's Windows and/or Windows NT operating systems. Microsoft has incorporated advanced utilities including telecommunications, facsimile and data recovery utilities in its most recent release, Windows 95, and may include additional product features in future releases of its operating systems that may 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED decrease the demand for certain of the Company's products. Should the Company be unable to successfully or timely develop products that operate under these 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 new or upgraded operating systems. The release of product upgrades typically results in an increase in net revenues in 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. In addition, between the date Symantec announces a new version or new product and the ultimate release date, distributors, dealers and end users often delay purchases, cancel orders or return existing versions of the Company's products in anticipation of the availability of the new version or new product. The Company's pattern of revenues and earnings may also be affected by a phenomenon known as "channel fill." Channel fill occurs following the introduction of a new product or a new version of a product as distributors buy significant quantities of the new product or new version in anticipation of sales of such product or version. 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." The phenomenon of channel fill also may occur in response to sales promotions or incentives or the discontinuance of sales promotions or incentives, some of which may be designed to encourage customers to accelerate purchases that might otherwise occur in later periods. Channels also may become filled simply because the distributors are unable to, or do not, sell their inventories to retail distribution or end users as originally anticipated. If sell-through does not occur at a sufficient rate, distributors will delay purchases, 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 levels deemed appropriate in the distribution channel; however, net revenues may still be materially affected favorably or adversely by the effects of channel fill. Channel fill did not have a material impact on the Company's revenues in the three and nine months ended December 31, 1996 and 1995 but may have a material impact in future periods, especially in periods where a large number of new products are introduced. The Company estimates and maintains reserves for product returns. 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 the Company's products. Various distributors and resellers may have different return policies that may negatively impact the level of products which are returned to Symantec. Product returns occur when the Company introduces upgrades and new versions of products or when distributors order excessive product. In addition, competitive factors often require the Company to offer rights of return for products that distributors or retail stores are unable to sell. 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. Symantec prepares detailed analyses of historical return rates when estimating anticipated returns and maintains reserves for product returns. In addition to detailed historical return rates, the Company's estimation of return reserves takes into consideration upcoming product upgrades, current market conditions, customer inventory balances and any other known factors that could impact anticipated returns. Based upon returns experienced, the Company's estimates have been materially accurate. 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 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED 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. Desktop software products are generally sold through the distribution channel or directly to end-users. The Company's distribution customers also carry the products of Symantec's competitors, some of which have significant financial resources. 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 those offered by its competitors over which the Company has no control and which it cannot predict. Symantec believes that many of its customers are moving toward an enterprise-wide computing environment where more desktop personal computers will be interconnected into large local-area and wide-area networks administered by corporate MIS departments as well as through the public Internet and corporate intranets. Symantec believes that it must continue to develop relationships with systems integrators and other third-party vendors that provide customer specific consulting and integration services and deliver products developed for this market segment. While the Company expects the market's shift toward enterprise, Internet/intranet products to continue, there can be no assurance that the Company's enterprise products will be successful or will gain customer acceptance. A very high proportion of enterprise product sales may be completed in the last few days of each quarter, in part because customers are able, or believe that they are able, to negotiate lower prices and more favorable terms. This uncertainty related to customer product acceptance and the 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 trend towards server-based applications, the Internet and intranet environments could have a material adverse effect on sales of the Company's desktop-based products. Enterprise products are frequently sold through site licenses where a license for multiple workstations is sold to a customer at a negotiated price. Enterprise product revenues are typically comprised of lower volume, high dollar site license transactions compared to desktop product revenues which are typically comprised of higher volume, low dollar pre-packaged product transactions. The prices of site licenses tend to vary based upon the individual products purchased, the number of units licensed and the number of workstations at the customer's site. Price competition is significant in the microcomputer business software market and may 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. This could have a material adverse effect on the Company's results of operations. In addition, aggressive pricing strategies of competitors in other software markets, some of whom have significant financial resources, may cause the Company to further reduce software prices and/or increase sales and marketing expenses on a number of the Company's products. Symantec has recently reduced pricing on several of the Company's key products. These decreases were more than offset by an increase in total number of units sold. 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 product development, including products being developed for currently available operating systems and operating systems under development are likely to occur in the future 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. In addition, there can be no assurance that any products currently being developed by Symantec will be technologically successful, that any resulting products will achieve market 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED acceptance or that the Company's products will be effective in competing with products either currently in the market or introduced in the future. During fiscal 1993, Symantec believes net revenues were adversely affected by an unexpected substantial price reduction in 486-based personal computers that caused a shift in customer spending from software to personal computer hardware. Symantec also believes that the shift was caused by the introduction of the Windows 3.1 operating system, which required more computing capability. The next class of personal computers, including those based on Intel's aggressively marketed P6/Pentium Pro microprocessor or Motorola, Inc.'s Power-PC, have started to reduce in price, and there may be another shift in customer buying away from software and Symantec's products, which could result in significantly reduced revenues and a material adverse effect on operating results. In addition, Windows 95 and Windows NT require significantly more computer memory and hard disk space than Windows 3.1, and if there is a shift from software to hardware spending, there could be an adverse effect on the sales of computer hardware and software. Either of these events could result in significantly reduced net revenues and have a material adverse effect on Symantec's operating results and on the Company's common stock price. 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. While Symantec believes its research and development expenditures will result in successful product introductions, including products being developed for currently available operating systems and operating systems under development, the uncertain outcome of software development projects means that increased research and development efforts will not necessarily result in successful product introductions due to technical difficulties, market conditions, competitive products and other factors, such as customer acceptance of products and new operating systems. Symantec maintains a research and development facility in Santa Monica, California that was damaged during the January 1994 earthquake in Southern California. 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. Symantec's domestic order entry department is located in Oregon, with shipments being made from a warehouse in California. Order entry and shipping is similarly separated in Europe. 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. Symantec has completed a number of acquisitions and expects to acquire other companies in the future. While the Company believes that previous acquisitions were in the best interests of the Company and its stockholders, 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 sales and research and development efforts and the successful integration of the acquired products. The Company has lost certain employees of acquired companies whom it desired to retain, 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 locations and facilities, the Company has not realized certain economies of scale or cost reductions that might otherwise have been achieved. Symantec typically incurs significant acquisition expenses for legal, accounting and financial advisory services, the write-off of duplicative technology, the consolidation and discontinuance of certain operational activities and other 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED expenses related to the combination of the companies. These expenses may have a significant adverse impact on the Company's future profitability and financial resources. The Company operates in a complex legal environment where, for example, an increasing number of patents are being issued that are potentially applicable to software. Additionally, allegations of patent infringement are becoming increasingly common in the software industry. 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. Additional information on these and other risk factors which could adversely affect the Company's financial results is included in the Annual Report on Form 10-K and the quarterly reports on Form 10-Q as filed by the Company with the Securities and Exchange Commission on June 26, 1996, August 9, 1996 and November 12, 1996, respectively. OVERVIEW Symantec develops, markets and supports a diversified line of application and network software products designed to enhance individual and workgroup productivity. Founded in 1982, the Company has offices in the United States, Canada, Japan, Australia, Europe, the Pacific Rim and Latin America. 15
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 ------------------ Amounts ------------------ Amounts 1996 1995 ------- 1996 1995 -------- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> Net revenues.......................... 100% 100% 12% 100% 100% 4% Cost of revenues...................... 18 28 (29) 19 27 (27) ---- ---- ---- ---- Gross margin...................... 82 72 28 81 73 15 Operating expenses: Research and development.......... 17 24 (20) 19 21 (8) Sales and marketing............... 46 54 (4) 48 53 (5) General and administrative........ 7 6 41 7 8 (12) Acquisition, restructuring and other expenses.................. -- 23 * 2 8 (67) ---- ---- ---- ---- Total operating expenses........ 70 107 (26) 76 90 (12) ---- ---- ---- ---- Operating income (loss)............... 12 (35) * 5 (17) * Interest income....................... 1 2 (11) 1 2 (16) Interest expense...................... -- -- 4 -- -- (9) Other income (expense), net........... -- -- 59 -- (1) * ---- ---- ---- ---- Income (loss) before income taxes..... 13 (33) * 6 (16) * Provision (benefit) for income taxes.. 2 -- * 1 (2) * ---- ---- ---- ---- Net income (loss)..................... 11% (33)% * 5% (14)% * ---- ---- ---- ---- ---- ---- ---- ---- </TABLE> * percentage change is not meaningful. 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED NET REVENUES. - ------------- Net revenues were $124.1 million and $111.1 million in the quarters ended December 31, 1996 and 1995, respectively. Strong sales of anti-virus, Internet tools, contact management and utilities products during the December 1996 quarter more than offset the declining sales on products which Symantec no longer actively develops or markets. Subsequent to December 1995, the price of Norton AntiVirus was reduced; however, the increase in unit sales more than offset the decrease in pricing, resulting in a year-to-year increase in net revenues. Included in the December 1996 quarter is $1.9 million in consulting fees related to a contract which was substantially completed as of the end of the December 1996 quarter. As a result of the sale of its electronic forms software products and related tangible assets to JetForm Corporation ("JetForm") in the September 1996 quarter, Symantec recognized royalty revenue of $5.5 million during the December 1996 quarter. Net revenues were $342.5 million and $329.5 million in the nine months ended December 31, 1996 and 1995, respectively. The $13.0 million increase in net revenues is primarily the result of strong anti-virus, network communications and Internet tools product sales, which more than offset the declining sales for products no longer actively developed or marketed by Symantec and the one time recognition of approximately $7.2 million of previously deferred Central Point Software, Inc. ("Central Point") revenue in 1995. Consulting net revenues increased by $6.1 million during the nine month period ended December 31,1996, as compared to the same period last year, as a result of a consulting contract which was substantially completed as of the end of the December 1996 quarter. During the nine month period ended December 31, 1996, the Company recognized royalty revenue totaling $12.7 million of the total $100.0 million JetForm sale price, the remainder of which JetForm is contractually obligated to remit to Symantec in quarterly payments concluding in June 2000. Due to the uncertainty regarding the collectibility of these amounts, Symantec is recognizing the payment amounts as received from JetForm. Net revenues from international sales were $37.9 million and $38.4 million and represented 31% and 35% of total net revenues in the quarters ended December 31, 1996 and 1995, respectively. Net revenues from international sales were $102.5 million and $114.8 million and represented 30% and 35% of total net revenues for the nine months ended December 31, 1996 and 1995, respectively. The decrease in international net revenue as a percentage of total net revenue is partially the result of domestic revenue growth during a period of international revenue decline. Additionally, international revenues for the nine months ended December 31, 1995 included the one time recognition of approximately $7.2 million, or 6% of total net revenues, previously deferred by Central Point prior to its acquisition by Symantec. For the comparable nine month periods, declining revenue was also recorded in the United Kingdom and Germany, primarily as the result of declining Windows 95 based product sales. Sales in Japan increased during the current fiscal year. During the December 1996 quarter, Symantec released various new products and upgrades including ACT! For Windows 95 and NT, pcHandyman, HealthyPC, CrashGuard, WinFax PRO 7.5, Visual Cafe, Visual Page, Norton Speed Disk Preview for Windows NT 4.0 and Norton AntiVirus for Internet Email Gateways. The Company's product return reserve balances typically fluctuate from period to period based upon the level and timing of product upgrade releases. Product return reserve balances at December 31, 1996 were substantially lower than reserve balances at December 31, 1995. The decrease in the product return reserve balance is primarily related to the introduction of Symantec's Windows 95 products during the September and December 1995 quarters, which had high sell-in volumes and, as a result, higher return provisions were estimated. The level of actual product returns and related product return reserves is largely a factor of the level of product sell-in (gross revenue) from normal sales activity and the replacement of obsolete quantities with current versions of the Company's product. As a result, gross revenues generally move in the same direction as product returns. Changes in the levels of product returns and related product return reserves are generally offset by changing levels of gross revenue and, therefore, do not typically have a material impact on reported net revenues. 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Symantec provides a wide variety of free and fee-based technical support services to its customers. Symantec provides its customers with free support via electronic and automated services as well as 90 days complimentary free telephone support for certain of the Company's products. In addition, Symantec offers both individual users and corporate customers a variety of fee-based support options for certain of the Company's products, designed to meet their individual technical support requirements. Fee-based technical support services did not generate significant net revenues in the three and nine months ended December 31, 1996 and 1995 and are not expected to generate material net revenues in the near future. 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. Amortization of capitalized software, including amortization and the write-off of both purchased product rights and capitalized software development expenses, totaled $0.6 million and $9.3 million for the quarters ended December 31, 1996 and 1995, respectively, and $3.3 million and $16.5 million for the nine months ended December 31, 1996 and 1995, respectively. The significant decrease in amortization and write-off of purchased product rights and capitalized software development expenses for the three and nine months ended December 31, 1996 from the 1995 periods is due to Symantec's decision during the September and December 1995 quarters to discontinue development and marketing efforts related to certain products and Delrina's write-off of capitalized software development costs for software designed to operate on the Windows 3.1 operating system. Gross margins were 82% and 72% for the quarters ended December 31, 1996 and 1995, respectively. The increase in the gross margin percentage is primarily due to the significant write-off of purchased product rights and capitalized software during the December 1995 quarter, as discussed above. In addition, a $5.5 million royalty payment associated with the JetForm transaction was recorded in net revenues during the December 1996 quarter. Royalty costs decreased by $1.2 million for the December 1996 quarter, as compared to the December 1995 quarter, due to a reduction in sales of products with royalty obligations. Symantec believes that the gross margin percentage should remain at approximately 80% to 83% for the remainder of fiscal 1997 unless there is a significant change in Symantec's net revenues or product mix. RESEARCH AND DEVELOPMENT EXPENSES. - ---------------------------------- Research and development expenses decreased 20% to $21.0 million or 17% of net revenues in the quarter ended December 31, 1996 from $26.3 million or 24% of net revenues in the quarter ended December 31, 1995. Research and development expenses decreased to 19% of net revenues in the nine months ended December 31, 1996 from 21% for the nine months ended December 31, 1995. Research and development expenditures are generally charged to operations as incurred. The decrease in research and development expense is principally due to decreased product development efforts associated with the Company's development of certain software products and an increase in capitalized software development costs. During the three and nine month periods ended December 31, 1996, the Company capitalized approximately $2.4 million and $7.7 million, respectively, of costs principally associated with the development of certain networking software products in accordance with Statement of Financial Accounting Standard No. 86. To the extent the Company capitalizes its product development costs, the effect is to defer such costs to future periods and match them to the revenue generated by the developed products. Amounts capitalized may fluctuate depending in part on the number and status of internally developed software projects. Capitalized software development costs were not material as of December 31, 1995. SALES AND MARKETING EXPENSES. - ----------------------------- Sales and marketing expenses decreased 4% to $57.5 million or 46% of net revenues in the quarter ended December 31, 1996 from $60.2 million or 54% of net revenues in the prior year's comparable quarter. The decrease 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in sales and marketing expenses was principally related to the elimination of duplicative sales and marketing expenses as a result of the acquisition of Delrina by Symantec and to the elimination of sales and marketing expenses related to the electronic forms software products which were sold to JetForm in September 1996. Reductions in expenditures for products no longer actively marketed by Symantec were offset by increased spending for new products released during the December 1996 quarter. These factors also contributed to the $8.6 million decrease in sales and marketing expenses to $164.2 million from $172.8 for the nine months ended December 31, 1996 and 1995, respectively. Symantec believes substantial sales and marketing efforts are essential to achieve revenue growth and to maintain and enhance Symantec's competitive position. Accordingly, with the introduction of new and upgraded products, Symantec expects the expenses associated with these efforts to continue to constitute its most significant operating expense. There can be no assurance that these increased sales and marketing efforts will be successful. GENERAL AND ADMINISTRATIVE EXPENSES. - ------------------------------------ General and administrative expenses increased from $6.3 million or 6% of net revenues in the quarter ended December 31, 1995 to $8.9 million or 7% of net revenues in the quarter ended December 31, 1996. The increase was primarily the result of management consulting expenditures. The decrease in general and administrative expenses from $27.2 million or 8% of net revenues for the nine months ended December 31, 1995 to $24.0 million or 7% of net revenues for the nine months ended December 31, 1996 is primarily due to the elimination of duplicative general and administrative expenses as a result of the acquisition of Delrina by Symantec. ACQUISITION, RESTRUCTURING AND OTHER EXPENSES. - ---------------------------------------------- Acquisition Expenses. - --------------------- During the quarter ended December 31, 1995, Symantec completed its acquisition of Delrina Corporation ("Delrina") and recorded total acquisition charges of $22.0 million. In addition, during the December 1995 quarter, Symantec incurred a $3.7 million charge related to the sale of certain assets and liabilities of a subsidiary of the Company and other expenses. During the September 1996 quarter, Symantec wrote off $1.8 million related to an investment in a joint venture and $3.1 million in connection with the acquisition of certain in-process software development. 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. In the quarter ended June 30, 1995, the Company recognized a reduction in accrued acquisition and restructuring expenses related to Central Point Software, Inc. ("Central Point") of $2.3 million as actual costs incurred were less than costs previously accrued by the companies. RESTRUCTURING AND OTHER NON-RECURRING EXPENSES. - ----------------------------------------------- During the September 1996 quarter, Symantec recorded $2.5 million for costs related to the restructuring of certain domestic and international sales and research and development operations. $0.7 million was recorded in the June 1996 quarter related to the centralization of certain research and development activities, litigation settlement costs and other non-recurring expenses. These restructuring plans should be substantially completed during fiscal 1997. In February 1995, Symantec announced a plan to consolidate certain research and development activities. This plan was designed to gain greater synergy between the Company's Third Generation Language and Fourth Generation Language development groups. During the quarter ended June 30, 1995, the Company incurred $2.2 million for the consolidation of equipment and personnel. This consolidation has subsequently been completed. 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME (EXPENSE). - ------------------------------------------------------------- Interest income was $1.6 million and $1.7 million in the quarters ended December 31, 1996 and 1995, respectively, and $5.0 million and $5.9 million for the nine months ended December 31, 1996 and 1995, respectively. The decrease in interest income for the three and nine month periods is due to lower average interest rates on invested cash balances. Interest expense was $0.4 million and $0.3 million for the three months ended December 31, 1996 and 1995, respectively, and $1.0 million and $1.1 million for the nine months ended December 31, 1996 and 1995, respectively. Other income (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 December 31, 1996, there was a total of approximately $125.1 million of outstanding forward exchange contracts. The net liability of forward contracts was approximately $97.3 million at December 31, 1996. 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 nine months ended December 31, 1996 was 14%, which is lower than the U.S. federal statutory tax rate due to the utilization of previously unbenefitted pre-acquisition losses from Delrina. Symantec believes that the effective tax rate may increase in future fiscal years. The effective tax benefit for the nine months ended December 31,1995 was 9%. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash, short-term investments and restricted investments totaled $180.7 million at December 31, 1996, as compared to $129.2 million at March 31, 1996. Cash provided by operating activities was partially offset by the reclassification of $47.3 million to restricted investments, a non-current asset. The restricted investment balance relates to collateral requirements under lease agreements entered into by Symantec during the current fiscal year. Net cash provided by operating activities was $67.9 million and was comprised of the Company's net income of $17.8 million and non-cash related expenses of $26.4 million and an decrease in net assets and liabilities of $23.7 million. Trade accounts receivable increased $2.5 million from $72.3 million at March 31, 1996 to $74.8 million at December 31, 1996 primarily due to higher revenue in the December 1996 quarter. Net inventories decreased $2.8 million from $7.9 million at March 31, 1996 to $5.1 million at December 31, 1996. The decrease in inventory balances was due to higher Delrina product inventories at March 31, 1996. Symantec has a $10.0 million bank line of credit that expires in March 1998. The Company was in compliance with the line of credit covenants at December 31, 1996. At December 31, 1996, there were no borrowings outstanding under this line and there was approximately $0.4 million of standby letters of credit outstanding under this line of credit. 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 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS under the line of credit, there would not be a material adverse impact on the financial results, liquidity or capital resources of the Company. As of December 31, 1996, Symantec is obligated under lease agreements for two office buildings in Cupertino, California, for which the Company is required to maintain a restricted cash balance to be invested in U.S. treasury notes with maturities not to exceed three years. In accordance with the lease terms, these funds would not be available to meet operating cash requirements. If the Company were to sustain significant operational losses, it would be required the pursue of alternative financing options. Subsequent to December 31, 1996, the Company entered into a lease agreement for land in Cupertino, California, with a restricted cash balance requirement. The restricted cash balance as of December 31, 1996 covers lease requirements for both office buildings and the land and is unavailable for working capital purposes. Symantec may utilize significant amounts of cash in connection with the potential acquisition of additional companies, capital equipment and software product rights in the future. However, if the Company were to sustain significant losses, there can be no assurances that the bank line of credit, which is available through March 1998, would remain available. Additionally, Symantec could be required to reduce operating expenses, which could result in product delays; reassess acquisition opportunities, which could negatively impact Symantec's growth objectives; and/or pursue other financing options. Symantec believes existing cash and short-term investments will be sufficient to fund operations for the next year. 21
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 9 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: None (b) Reports on Form 8-K None ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 22
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 10, 1997 SYMANTEC CORPORATION By /s/ Robert R. B. Dykes ------------------------------------------- Robert R. B.Dykes Executive Vice President/Worldwide Operations and Chief Financial Officer (duly authorized officer) /s/ Howard A. Bain III ------------------------------------------- Howard A. Bain III Vice President Finance and Chief Accounting Officer 23