| (Mark One) | ||
| þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 27, 2002. | |
| OR | ||
| o | 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 the registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
77-0181864 (I.R.S. employer identification no.) |
|
| 20330 Stevens Creek Blvd., Cupertino, California (Address of principal executive offices) |
95014-2132 (zip code) |
|
| Registrant’s telephone number, including area code: | (408) 517-8000 |
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 þ NO o
Shares of Symantec common stock, $0.01 par value per share, outstanding as of October 25, 2002 (including 2,300,409 shares of Delrina exchangeable stock): 144,652,184 shares
SYMANTEC CORPORATION
FORM 10-Q
Quarterly Period Ended September 27, 2002
Table of Contents
PART I. Financial Information
| Page | ||||
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Item 1.
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Financial
Statements (unaudited)
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Condensed
Consolidated Balance Sheets
as of September 30, 2002 and March 31, 2002 |
3
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Condensed
Consolidated Statements of Operations
for the three and six months ended September 30, 2002 and 2001 |
4
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Condensed
Consolidated Statements of Cash Flows
for the six months ended September 30, 2002 and 2001 |
5
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Notes
to Condensed Consolidated Financial Statements
|
6
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Item 2.
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Management’s
Discussion and Analysis of Financial
Condition and Results of Operations |
17
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Item 3.
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Quantitative
and Qualitative Disclosures about Market Risk
|
31
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Item 4.
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Controls
and Procedures
|
31
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PART
II. Other Information
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Item 1.
|
Legal
Proceedings
|
32
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Item 4.
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Submission
of Matters to a Vote of Security Holders
|
32
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Item 5.
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Other
Information
|
34
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Item 6.
|
Exhibits
and Reports on Form 8-K
|
34
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Signatures
|
35
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Certifications
|
36
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Part I. Financial Information
Item 1. Financial Statements
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | March 31, | |||||||||
| (In thousands, except par value) | 2002 | 2002* | ||||||||
| (unaudited) | ||||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash, cash equivalents and short-term investments |
$ | 1,169,480 | $ | 1,375,051 | ||||||
Trade accounts receivable, net |
154,128 | 89,223 | ||||||||
Inventories |
8,272 | 7,463 | ||||||||
Deferred income taxes |
77,471 | 68,621 | ||||||||
Other |
30,646 | 22,461 | ||||||||
Total current assets |
1,439,997 | 1,562,819 | ||||||||
Restricted investments |
118,506 | 124,313 | ||||||||
Property, equipment and leasehold improvements, net |
212,786 | 186,305 | ||||||||
Deferred income taxes |
17,523 | 6,207 | ||||||||
Acquired product rights, net |
91,254 | 65,219 | ||||||||
Goodwill, net |
834,600 | 525,868 | ||||||||
Other, net |
32,293 | 31,874 | ||||||||
| $ | 2,746,959 | $ | 2,502,605 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 78,826 | $ | 70,057 | ||||||
Accrued compensation and benefits |
62,819 | 54,419 | ||||||||
Deferred revenue |
427,879 | 331,100 | ||||||||
Other accrued expenses |
77,734 | 70,745 | ||||||||
Income taxes payable |
57,515 | 52,777 | ||||||||
Total current liabilities |
704,773 | 579,098 | ||||||||
Convertible subordinated debentures |
600,000 | 600,000 | ||||||||
Other long-term obligations |
5,324 | 3,631 | ||||||||
| Commitments and contingencies | ||||||||||
| Stockholders’ equity: | ||||||||||
Preferred stock (par value: $0.01, authorized: 1,000; issued and
outstanding: none) |
— | — | ||||||||
Common stock (par value: $0.01, authorized: 300,000; issued and
outstanding: 143,322 and 143,559 shares, respectively) |
1,433 | 1,436 | ||||||||
Capital in excess of par value |
1,197,819 | 1,194,173 | ||||||||
Accumulated other comprehensive loss |
(20,133 | ) | (53,013 | ) | ||||||
Unearned compensation |
(124 | ) | (372 | ) | ||||||
Retained earnings |
257,867 | 177,652 | ||||||||
Total stockholders’ equity |
1,436,862 | 1,319,876 | ||||||||
| $ | 2,746,959 | $ | 2,502,605 | |||||||
* Amounts as of March 31, 2002 were derived from the March 31, 2002 audited consolidated financial statements.
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
3
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended | Six Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| (In thousands, except net income (loss) per share; unaudited) | 2002 | 2001 | 2002 | 2001 | ||||||||||||||
Net revenues |
$ | 325,231 | $ | 242,372 | $ | 641,272 | $ | 470,408 | ||||||||||
Cost of revenues |
61,159 | 45,478 | 116,611 | 90,305 | ||||||||||||||
Gross margin |
264,072 | 196,894 | 524,661 | 380,103 | ||||||||||||||
Operating expenses: |
||||||||||||||||||
Research and development |
47,344 | 40,020 | 92,832 | 79,491 | ||||||||||||||
Sales and marketing |
124,896 | 102,356 | 240,064 | 203,636 | ||||||||||||||
General and administrative |
17,254 | 11,317 | 32,608 | 23,439 | ||||||||||||||
Amortization of goodwill |
— | 49,416 | — | 98,396 | ||||||||||||||
Amortization of other intangibles from acquisitions |
665 | 536 | 1,201 | 1,072 | ||||||||||||||
Acquired in-process research and development |
4,700 | — | 4,700 | — | ||||||||||||||
Restructuring, site closures and other |
(1,179 | ) | — | 4,874 | 2,046 | |||||||||||||
Total operating expenses |
193,680 | 203,645 | 376,279 | 408,080 | ||||||||||||||
Operating income (loss) |
70,392 | (6,751 | ) | 148,382 | (27,977 | ) | ||||||||||||
Interest income |
9,723 | 7,366 | 19,369 | 14,953 | ||||||||||||||
Interest expense |
(5,292 | ) | — | (10,583 | ) | — | ||||||||||||
Income, net of expense, from sale of technologies
and product lines |
2,444 | 4,642 | 4,680 | 8,892 | ||||||||||||||
Other expense, net |
(134 | ) | (727 | ) | (1,125 | ) | (993 | ) | ||||||||||
Income (loss) before income taxes |
77,133 | 4,530 | 160,723 | (5,125 | ) | |||||||||||||
Provision for income taxes |
25,139 | 16,342 | 52,160 | 27,905 | ||||||||||||||
Net income (loss) |
$ | 51,994 | $ | (11,812 | ) | $ | 108,563 | $ | (33,030 | ) | ||||||||
Net income (loss) per share — basic |
$ | 0.36 | $ | (0.08 | ) | $ | 0.75 | $ | (0.23 | ) | ||||||||
Net income (loss) per share — diluted |
$ | 0.33 | $ | (0.08 | ) | $ | 0.69 | $ | (0.23 | ) | ||||||||
Shares used to compute net income (loss)
per share — basic |
144,537 | 145,800 | 144,225 | 146,200 | ||||||||||||||
Shares used to compute net income (loss)
per share — diluted |
168,489 | 145,800 | 168,743 | 146,200 | ||||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
4
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six Months Ended | |||||||||||
| September 30, | |||||||||||
| (In thousands; unaudited) | 2002 | 2001 | |||||||||
Operating Activities: |
|||||||||||
Net income (loss) |
$ | 108,563 | $ | (33,030 | ) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating
activities: |
|||||||||||
Depreciation and amortization of property, equipment and leasehold improvements |
25,858 | 13,920 | |||||||||
Amortization of debt issuance costs and other assets |
3,115 | (385 | ) | ||||||||
Amortization and write-off of acquired product rights |
14,505 | 16,055 | |||||||||
Amortization of goodwill and other intangibles from acquisitions |
1,201 | 99,468 | |||||||||
Loss on equity investments |
750 | — | |||||||||
Write-off of equipment and leasehold improvements |
3,304 | 4,736 | |||||||||
Acquired in-process research and development |
4,700 | — | |||||||||
Deferred income taxes |
564 | — | |||||||||
Gain on divestiture of the web access management product line |
— | (392 | ) | ||||||||
Income tax benefit from stock options |
8,065 | 23,480 | |||||||||
Net change in assets and liabilities, excluding effects of acquisitions: |
|||||||||||
Trade accounts receivable |
(56,785 | ) | (22,956 | ) | |||||||
Inventories |
(362 | ) | (1,160 | ) | |||||||
Other current assets |
(439 | ) | 1,710 | ||||||||
Other assets |
645 | 392 | |||||||||
Accounts payable |
(868 | ) | (5,769 | ) | |||||||
Accrued compensation and benefits |
3,120 | (1,602 | ) | ||||||||
Other accrued expenses |
(8,276 | ) | (8,557 | ) | |||||||
Deferred revenue |
83,168 | 53,878 | |||||||||
Income taxes payable |
1,478 | (22,310 | ) | ||||||||
Other long-term obligations |
(28 | ) | — | ||||||||
Net cash provided by operating activities |
192,278 | 117,478 | |||||||||
Investing Activities: |
|||||||||||
Capital expenditures |
(42,578 | ) | (44,961 | ) | |||||||
Purchased intangibles |
— | (300 | ) | ||||||||
Purchase of Foster-Melliar |
— | (1,499 | ) | ||||||||
Purchase of Lindner & Pelc |
(59 | ) | (2,137 | ) | |||||||
Purchase of 20/20 Software |
— | (1,535 | ) | ||||||||
Purchase of Riptech |
(139,552 | ) | — | ||||||||
Purchase of Recourse |
(135,172 | ) | — | ||||||||
Purchase of SecurityFocus |
(72,786 | ) | — | ||||||||
Purchase of Mountain Wave |
(19,919 | ) | — | ||||||||
Purchase of equity investments |
(2,500 | ) | (1,000 | ) | |||||||
Purchases of marketable securities |
(975,785 | ) | (275,209 | ) | |||||||
Proceeds from sales of marketable securities |
1,106,082 | 309,290 | |||||||||
Proceeds from (purchases of) long-term, restricted investments |
5,807 | (21,386 | ) | ||||||||
Net cash used in investing activities |
(276,462 | ) | (38,737 | ) | |||||||
Financing Activities: |
|||||||||||
Repurchases of common stock |
(64,332 | ) | (204,420 | ) | |||||||
Net proceeds from sales of common stock and other |
31,810 | 62,692 | |||||||||
Net cash used in financing activities |
(32,522 | ) | (141,728 | ) | |||||||
Effect of exchange rate fluctuations on cash and cash equivalents |
6,397 | 893 | |||||||||
Decrease in cash and cash equivalents |
(110,309 | ) | (62,094 | ) | |||||||
Beginning cash and cash equivalents |
379,237 | 227,923 | |||||||||
Ending cash and cash equivalents |
$ | 268,928 | $ | 165,829 | |||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
5
SYMANTEC CORPORATION
Notes to Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
The condensed consolidated financial statements of Symantec Corporation as of September 30, 2002 and for the three and six months ended September 30, 2002 and 2001 are unaudited and, in the opinion of management, contain all adjustments, consisting of only normal recurring items necessary for the fair presentation of the financial position and results of operations for the interim periods. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2002. The results of operations for the three and six months ended September 30, 2002 are not necessarily indicative of the results to be expected for the entire year. All significant intercompany accounts and transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to the current presentation format.
We have a 52/53-week fiscal accounting year. Accordingly, all references as of and for the periods ended September 30, 2002, March 31, 2002 and September 30, 2001 reflect amounts as of and for the periods ended September 27, 2002, March 29, 2002 and September 28, 2001, respectively. The three months ended September 30, 2002 and 2001 each comprised 13 weeks of activity. The six months ended September 30, 2002 and 2001 each comprised 26 weeks of activity.
Recent Accounting Pronouncements
On April 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to an annual impairment test. Other intangibles will continue to be amortized over their useful lives. In addition, SFAS No. 142 requires acquired workforce-in-place to be reclassified as goodwill.
In accordance with SFAS No. 142, we ceased the amortization of goodwill and intangible assets deemed to have indefinite lives and recharacterized acquired workforce-in-place (and the related deferred tax liability) as goodwill on April 1, 2002. We also performed the initial goodwill impairment test required by SFAS No. 142 during the June 2002 quarter. We have identified four reporting units, which represent four of our primary operating segments as indicated in Note 11, and determined that there was no impairment of goodwill recorded upon implementation of SFAS No. 142. We will continue to test for impairment on an annual basis, or earlier if indicators of impairment exist.
In October 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and addresses financial accounting and reporting for the impairment and disposal of long-lived assets. We adopted this statement on April 1, 2002 and adoption of this statement did not have a material impact on our financial position or results of operations.
The lessors associated with lease agreements relating to certain of our facilities are special purpose entities or equivalent structures. Presently, we account for these leases as operating leases, while the special purpose entities or equivalent structures own and account for the leased assets and related liabilities in their records. In July 2002, the FASB issued a proposed interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, that addresses the consolidation of special purpose entities. The proposed interpretation provides guidance for determining when an entity (such as us), the primary beneficiary, should consolidate another entity, a special purpose entity or equivalent structure (such as the lessor), that functions to support the activities of the primary beneficiary. The expected proposed interpretation may result in us having to consolidate the financial position and operating results of the special purpose entities and equivalent structures, which are the lessors under the aforementioned operating lease agreements. The effective date of these proposed new rules could be as early as the beginning of our fiscal year ending March 31, 2004, and immediately for any new leases which utilize special purpose entities or equivalent structures entered into after the new rules’ effective date.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that the liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than when a commitment is made to an exit or disposal plan. SFAS No. 146 also
6
SYMANTEC CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
establishes that the liability should initially be measured and recorded at fair value. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect the adoption of this statement to have a material effect on our financial position or results of operations.
Note 2. Balance Sheet Information
| September 30, | March 31, | ||||||||
| (In thousands) | 2002 | 2002 | |||||||
| (unaudited) | |||||||||
Cash, cash equivalents and short-term investments: |
|||||||||
Cash |
$ | 112,490 | $ | 123,030 | |||||
Cash equivalents |
156,438 | 256,207 | |||||||
Short-term investments |
900,552 | 995,814 | |||||||
| $ | 1,169,480 | $ | 1,375,051 | ||||||
Trade accounts receivable, net: |
|||||||||
Receivables |
$ | 166,336 | $ | 99,304 | |||||
Less: allowance for doubtful accounts |
(12,208 | ) | (10,081 | ) | |||||
| $ | 154,128 | $ | 89,223 | ||||||
Property, equipment and leasehold improvements, net: |
|||||||||
Computer hardware and software |
$ | 288,784 | $ | 260,170 | |||||
Office furniture and equipment |
62,718 | 49,887 | |||||||
Buildings and land |
46,045 | 41,671 | |||||||
Leasehold improvements |
45,103 | 35,265 | |||||||
| 442,650 | 386,993 | ||||||||
Less: accumulated depreciation and amortization |
(229,864 | ) | (200,688 | ) | |||||
| $ | 212,786 | $ | 186,305 | ||||||
Acquired product rights, net: |
|||||||||
Purchased product rights and technologies |
$ | 166,129 | $ | 125,589 | |||||
Less: accumulated amortization of purchased product rights
and technologies |
(74,875 | ) | (60,370 | ) | |||||
| $ | 91,254 | $ | 65,219 | ||||||
Goodwill, net: |
|||||||||
Goodwill |
$ | 1,126,803 | $ | 818,071 | |||||
Less: accumulated amortization |
(292,203 | ) | (292,203 | ) | |||||
| $ | 834,600 | $ | 525,868 | ||||||
Other, net: |
|||||||||
Other long-term assets, net |
$ | 25,903 | $ | 26,883 | |||||
Other intangible assets |
12,300 | 9,700 | |||||||
Less: accumulated amortization of other intangible assets |
(5,910 | ) | (4,709 | ) | |||||
| $ | 32,293 | $ | 31,874 | ||||||
Accumulated other comprehensive loss: |
|||||||||
Unrealized gain on available-for-sale securities |
$ | 1,750 | $ | 718 | |||||
Cumulative translation adjustment |
(21,883 | ) | (53,731 | ) | |||||
| $ | (20,133 | ) | $ | (53,013 | ) | ||||
7
SYMANTEC CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
Note 3. Goodwill, Acquired Product Rights and Other Intangible Assets
With the adoption of SFAS No. 142, we ceased the amortization of goodwill and intangible assets deemed to have indefinite lives and recharacterized acquired workforce-in-place (and the related deferred tax liability) as goodwill on April 1, 2002. Accordingly, there was no amortization of goodwill and acquired workforce-in-place during the three and six months ended September 30, 2002.
The following table presents a reconciliation of previously reported net income (loss) and net income (loss) per share to the amounts adjusted for the exclusion of the amortization of goodwill and acquired workforce-in-place, net of the related income tax effect:
| Three Months Ended | Six Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| (In thousands, except per share data; unaudited) | 2002 | 2001 | 2002 | 2001 | |||||||||||||
Net income (loss), as reported |
$ | 51,994 | $ | (11,812 | ) | $ | 108,563 | $ | (33,030 | ) | |||||||
Amortization of goodwill and acquired
workforce-in-place, net of tax benefit
of $0, $686, $0 and $1,372 |
— | 49,438 | — | 98,440 | |||||||||||||
Net income as adjusted |
$ | 51,994 | $ | 37,626 | $ | 108,563 | $ | 65,410 | |||||||||
Net income (loss) per share-basic, as reported |
$ | 0.36 | $ | (0.08 | ) | $ | 0.75 | $ | (0.23 | ) | |||||||
Amortization of goodwill and acquired
workforce-in-place, net of tax benefit
of $0, $686, $0 and $1,372 |
— | 0.34 | — | 0.67 | |||||||||||||
Net income per share-basic, as adjusted |
$ | 0.36 | $ | 0.26 | $ | 0.75 | $ | 0.44 | |||||||||
Net income (loss) per share-diluted, as reported |
$ | 0.33 | $ | (0.08 | ) | $ | 0.69 | $ | (0.23 | ) | |||||||
Amortization of goodwill and acquired
workforce-in-place, net of tax benefit
of $0, $686, $0 and $1,372 |
— | 0.33 | — | 0.64 | |||||||||||||
Net income per share-diluted, as adjusted* |
$ | 0.33 | $ | 0.25 | $ | 0.69 | $ | 0.41 | |||||||||
* For the three and six months ended September 30, 2001, total shares used for the purpose of calculating net income per share (diluted), as adjusted include approximately 4.6 million and 6.7 million shares, respectively, issuable from the assumed exercise of outstanding options.
Acquired product rights and other intangible assets subject to amortization were as follows:
| September 30, | March 31, | |||||||||
| (In thousands) | 2002 | 2002 | ||||||||
| (unaudited) | ||||||||||
Acquired product rights, net: |
||||||||||
Purchased product rights and technologies |
$ | 166,129 | $ | 125,589 | ||||||
Less: accumulated amortization of purchased product rights
and technologies |
(74,875 | ) | (60,370 | ) | ||||||
| $ | 91,254 | $ | 65,219 | |||||||
Other intangible assets, net: |
||||||||||
Other intangible assets |
$ | 12,300 | $ | 9,700 | ||||||
Less: accumulated amortization of other intangible assets |
(5,910 | ) | (4,709 | ) | ||||||
| $ | 6,390 | $ | 4,991 | |||||||
Amortization expense for acquired product rights and other intangible assets (customer base, tradenames and marketing-related assets) was $7.4 million and $0.7 million, respectively, during the September 2002 quarter and $14.5 million and $1.2 million, respectively, during the six months ended September 30, 2002. The estimated annual
8
SYMANTEC CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
amortization expense for acquired product rights is $32.1 million, $33.4 million, $24.4 million, $9.3 million and $5.4 million for fiscal year 2003, 2004, 2005, 2006 and 2007, respectively, based upon existing acquired product rights. The estimated annual amortization expense for other intangible assets is $2.8 million, $2.6 million, $1.5 million, $0.5 million and $0.2 million for fiscal year 2003, 2004, 2005, 2006 and 2007, respectively, based upon existing intangible assets.
Note 4. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| (In thousands; unaudited) | 2002 | 2001 | 2002 | 2001 | |||||||||||||
Net income (loss) |
$ | 51,994 | $ | (11,812 | ) | $ | 108,563 | $ | (33,030 | ) | |||||||
Other comprehensive income (loss): |
|||||||||||||||||
Change in unrealized gain on
available-for-sale investments,
net of tax expense (benefit) of $(154),
$0, $862 and $0 |
433 | 3,070 | 1,032 | 2,445 | |||||||||||||
Change in cumulative translation adjustment |
(11,891 | ) | 8,952 | 31,848 | 8,018 | ||||||||||||
Total other comprehensive income (loss) |
(11,458 | ) | 12,022 | 32,880 | 10,463 | ||||||||||||
Comprehensive income (loss) |
$ | 40,536 | $ | 210 | $ | 141,443 | $ | (22,567 | ) | ||||||||
Note 5. Net Income (Loss) Per Share
The components of net income (loss) per share were as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (In thousands, except per share data; unaudited) | 2002 | 2001 | 2002 | 2001 | ||||||||||||
Basic Net Income (Loss) Per Share |
||||||||||||||||
Net income (loss) |
$ | 51,994 | $ | (11,812 | ) | $ | 108,563 | $ | (33,030 | ) | ||||||
Weighted average number of common
shares outstanding during the period |
144,537 | 145,800 | 144,225 | 146,200 | ||||||||||||
Basic net income (loss) per share |
$ | 0.36 | $ | (0.08 | ) | $ | 0.75 | $ | (0.23 | ) | ||||||
Diluted Net Income (Loss) Per Share |
||||||||||||||||
Net income (loss) |
$ | 51,994 | $ | (11,812 | ) | $ | 108,563 | $ | (33,030 | ) | ||||||
Interest on convertible subordinated debentures,
net of income tax effect |
3,599 | — | 7,196 | — | ||||||||||||
Net income (loss), as adjusted |
$ | 55,593 | $ | (11,812 | ) | $ | 115,759 | $ | (33,030 | ) | ||||||
Weighted average number of common
shares outstanding during the period |
144,537 | 145,800 | 144,225 | 146,200 | ||||||||||||
Shares issuable from assumed conversion
of options |
6,377 | — | 6,943 | — | ||||||||||||
Shares issuable from assumed conversion
of convertible subordinated debentures |
17,575 | — | 17,575 | — | ||||||||||||
Total shares for purpose of calculating
diluted net income (loss) per share |
168,489 | 145,800 | 168,743 | 146,200 | ||||||||||||
Diluted net income (loss) per share |
$ | 0.33 | $ | (0.08 | ) | $ | 0.69 | $ | (0.23 | ) | ||||||
9
SYMANTEC CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
For the three months and six months ended September 30, 2002, approximately 8.6 million and 3.7 million shares, respectively, issuable from assumed exercise of options were excluded from the computation of diluted net income per share, as their effect would have been anti-dilutive. For the three months and six months ended September 30, 2001, approximately 14.8 million and 14.0 million shares, respectively, issuable from assumed exercise of options were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive due to the net loss reported in the period.
Note 6. Common Stock Repurchases
On January 16, 2001, the Board of Directors replaced an earlier stock repurchase program with a new authorization to repurchase up to $700.0 million of Symantec common stock, not to exceed 30.0 million shares, with no expiration date. As of the end of the September 2002 quarter, we had repurchased a total of 21.9 million shares under this program at prices ranging from $17.78 to $29.97 per share, for an aggregate amount of approximately $513.2 million. During the September 2002 quarter, we repurchased 2.2 million shares at prices ranging from $27.93 to $29.97 per share, for an aggregate amount of approximately $64.3 million. During the September 2001 quarter, we repurchased 9.6 million shares at prices ranging from $17.78 to $24.50 per share, for an aggregate amount of approximately $204.4 million. No shares were repurchased during the June 2002 and 2001 quarters.
Note 7. Convertible Subordinated Debentures
On October 24, 2001, we completed a private offering of $600.0 million of 3% convertible subordinated debentures due November 1, 2006, the net proceeds of which were approximately $584.6 million. The debentures are convertible into shares of our common stock by the holders at any time before maturity at a conversion price of $34.14 per share, subject to certain adjustments. We may redeem the debentures on or after November 5, 2004, at a redemption price of 100.75% of stated principal during the period November 5, 2004 through October 31, 2005 and 100% thereafter. Interest is paid semi-annually, and we commenced making these payments on May 1, 2002. Debt issuance costs of approximately $15.8 million, related to the 3% convertible subordinated debentures, is amortized on a straight-line basis through November 1, 2006. We have reserved approximately 17.6 million shares of common stock for issuance upon conversion of the 3% convertible subordinated debentures. As of September 30, 2002, there has been no conversion of the 3% convertible subordinated debentures.
Note 8. Acquisitions
During the September 2002 quarter, we acquired four privately-held companies for a total of approximately $375.2 million in cash. The results of operations of the acquired companies have been included in the Company’s operations as of the dates of acquisition. The following acquired companies are included in our Enterprise Security segment, with the exception of Riptech which is included in our Services segment:
Riptech
On August 19, 2002, we acquired Riptech, Inc., a provider of scalable, real-time managed security services that protect clients through advanced outsourced security monitoring and professional services, for $145.0 million. Under the transaction, we recorded approximately $2.1 million for acquired in-process research and development, $12.2 million for developed technology, $0.5 million for acquired product rights, $117.8 million for goodwill, $8.0 million for net deferred tax assets and $7.6 million for tangible assets, net of liabilities. We also accrued approximately $3.2 million in acquisition related expenses, which included financial advisory, legal and accounting fees, duplicative sites and severance costs, of which $2.7 million remains as an accrual as of September 30, 2002.
The amounts allocated to developed technology and acquired product rights will be amortized to cost of revenues over their useful lives of five years and one year, respectively.
Recourse
On August 19, 2002, we acquired Recourse Technologies, Inc., a provider of
security threat management solutions that detect, analyze and respond to both
known and novel threats, including intrusions, internal attacks and denial of
service attacks, for approximately $135.3 million. Under the transaction, we
recorded approximately $1.0 million for acquired in-process research and
development, $19.0 million for developed technology, $109.3 million for
goodwill, $2.2 million for other intangibles, $9.1 million for net deferred tax
assets and $1.9 million for liabilities, net of
10
SYMANTEC CORPORATION tangible assets. We also accrued approximately $3.3 million in acquisition
related expenses, which included financial advisory, legal, tax and accounting
fees, duplicative sites and severance costs, of which $3.1 million remains as
an accrual as of September 30, 2002.
The amount allocated to developed technology will be amortized to cost of
revenues over the useful life of four years. The amount allocated to other
intangibles will be amortized to operating expenses over its useful life of one
year.
SecurityFocus
On August 5, 2002, we acquired SecurityFocus, Inc., a provider of enterprise
security threat management systems, providing global early warning of cyber
attacks, customized and comprehensive threat alerts, and countermeasures to
prevent attacks before they occur, for approximately $74.9 million. Under the
transaction, we recorded approximately $1.6 million for acquired in-process
research and development, $3.5 million for developed technology, $3.3 million
for acquired product rights, $64.3 million for goodwill, $2.1 million for other
intangibles, $0.5 million for net deferred tax assets and $1.2 million for
tangible assets, net of liabilities. We also accrued approximately $1.7 million
in acquisition related expenses, which included legal, tax and accounting fees,
duplicative site and fixed asset expenses, and severance costs, of which $1.1
million remains as an accrual as of September 30, 2002.
The amounts allocated to developed technology and acquired product rights will
be amortized to cost of revenues over their useful lives of one to four years.
The amount allocated to other intangibles will be amortized to operating
expenses over its useful life of four years.
Mountain Wave
On July 2, 2002, we acquired Mountain Wave, Inc., a provider of automated
attack sensing and warning software and services for real-time enterprise
security operations management, for $20.0 million. Under the transaction, we
recorded approximately $2.0 million for developed technology, $17.3 million for
goodwill, $1.7 million for net deferred tax assets and $0.4 million for
liabilities, net of tangible assets. We also accrued approximately $0.7 million
in acquisition related expenses, which included legal and accounting fees,
duplicative site and severance costs, of which $0.06 million remains as an
accrual as of September 30, 2002.
The amount allocated to developed technology will be amortized to cost of
revenues over its useful life of five years.
Since all pre-acquisition contingencies, primarily general representations and
warranties related to certain escrow arrangements, have not yet been finalized,
the allocation of purchase price and its components for each of these
acquisitions may continue to change through the end of the September 2003
quarter.
The following table summarizes the allocation of the purchase price for each of
the acquisitions during the September 2002 quarter (in thousands):
Table of Contents
Notes to Condensed Consolidated Financial Statements, continued
| Allocated Purchase Price Components | |||||||||||||||||||||||||||||
| Acquired | |||||||||||||||||||||||||||||
| developed | Acquired | Deferred | Other assets | ||||||||||||||||||||||||||
| Purchase | technology | product | Other | tax | (liabilities), | ||||||||||||||||||||||||
| Price | and IPR&D | rights | Goodwill | intangibles | assets, net | net | |||||||||||||||||||||||
Riptech |
$ | 148,163 | $ | 2,100 | $ | 12,700 | $ | 117,770 | $ | — | $ | 7,974 | $ | 7,619 | |||||||||||||||
Recourse |
138,622 | 1,000 | 19,000 | 109,265 | 2,164 | 9,090 | (1,897 | ) | |||||||||||||||||||||
SecurityFocus |
76,595 | 1,600 | 6,840 | 64,318 | 2,100 | 503 | 1,234 | ||||||||||||||||||||||
Mountain Wave |
20,698 | — | 2,000 | 17,320 | — | 1,740 | (362 | ) | |||||||||||||||||||||
Total |
$ | 384,078 | $ | 4,700 | $ | 40,540 | $ | 308,673 | $ | 4,264 | $ | 19,307 | $ | 6,594 | |||||||||||||||
We wrote off a total of $4.7 million of acquired in-process research and development, because the acquired technologies had not reached technological feasibility and had no alternative uses. The efforts required to develop
11
SYMANTEC CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
the acquired in-process technology principally relate to the completion of all planning, design, development and test activities that are necessary to establish that the product or service can be produced to meet its design specifications, including features, functions and performance. We expect the acquired in-process technology to be developed into commercially feasible products. However, there are no assurances that this will occur. If we fail to complete these products in their entirety, or in a timely manner, we may not continue to attract new users, we may be unable to retain our existing users and the value of the other intangible assets may become impaired.
We determined the fair value of the acquired in-process technology for each of the purchases by estimating the projected cash flows related to these projects and future revenues to be earned upon commercialization of the products. We discounted the resulting cash flows back to their net present values. We based the net cash flows from such projects on our analysis of the respective markets and estimates of revenues and operating profits related to these projects.
Acquisition of Lindner & Pelc
On August 30, 2001, we purchased 100% of the outstanding shares of Lindner & Pelc Consult GmbH, a security services and implementation company in Berlin, Germany, for approximately $2.2 million. The transaction was accounted for as a purchase and we recorded approximately $2.1 million in goodwill. Under the terms of the agreement, we may also be liable for contingency payments based on targeted future sales through September 2004. The maximum aggregate amount of such contingency payments is approximately $2.0 million. During the June 2002 quarter, $0.7 million was recorded as compensation expense, as it was determined that this amount of the contingency payments will be paid under the agreement. The amount of $0.7 million remains as an accrual as of September 30, 2002.
Pro Forma. The following unaudited pro forma results of operations for fiscal 2003 and 2002 are as if the Riptech acquisition had occurred at the beginning of each fiscal period presented. The pro forma information excludes $49.4 million and $98.4 million of goodwill amortization from non-related acquisitions for the three month and six month periods ended September 30, 2001. The pro forma information excludes $2.1 million of acquired in-process research and development for the three month and six month periods ended September 30, 2002. The pro forma information excludes $0.7 million and $1.5 million of amortization related to developed technology and other intangibles for the three month and six month periods ended September 30, 2001. Additionally, the pro forma information excludes $0.5 million and $1.3 million of amortization related to developed technology and other intangibles for the three month and six month periods ended September 30, 2002.
The pro forma information has been prepared for comparative purposes only and is not indicative of what operating results would have been if the acquisition had taken place at the beginning of fiscal 2003 or of future operating results. Financial information prepared in accordance with U.S. GAAP for Recourse was not available due to insufficient record-keeping during the interim and annual periods in fiscal 2002 and interim periods in 2003 and, as such, has not been included in this pro forma information. Pro forma information for SecurityFocus and Mountain Wave was not presented as the SecurityFocus and Mountain Wave acquisitions were deemed not significant.
| Three Months Ended | Six Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (In thousands, except per share data; unaudited) | 2002 | 2001 | 2002 | 2001 | ||||||||||||
Net revenues |
$ | 327,734 | $ | 244,657 | $ | 648,088 | $ | 473,769 | ||||||||
Net (loss) income, net of tax |
$ | 36,008 | $ | 23,330 | $ | 71,381 | $ | 39,845 | ||||||||
Basic net (loss) income per share |
$ | 0.25 | $ | 0.16 | $ | 0.49 | $ | 0.27 | ||||||||
Diluted net (loss) income per share |
$ | 0.24 | $ | 0.16 | $ | 0.47 | $ | 0.26 | ||||||||
12
SYMANTEC CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
Note 9. Restructuring, Site Closures and Other
During the September 2002 quarter, we recorded approximately $0.7 million for the costs of severance, related benefits and outplacement services associated with the reduction in operations of our San Antonio, Texas site. As a result, our workforce was reduced by 51 employees. As of September 30, 2002, we had an accrual of approximately $0.3 million outstanding related to severance, related benefits and outplacement service charges.
During the June 2002 quarter, we recorded approximately $6.1 million for costs of severance, related benefits, outplacement services and abandonment of certain fixed assets primarily associated with the restructuring and relocation of our Leiden, Netherlands operations to Dublin, Ireland and the outsourcing of our North American and European consumer support functions. As a result of this relocation, our workforce was reduced by 251 employees. This estimate was subsequently revised in the September 2002 quarter, resulting in a reduction in severance, related benefits and outplacement services accrual by approximately $0.9 million. As of September 30, 2002, we had an accrual of approximately $1.5 million outstanding related to these severance, related benefits and outplacement service charges.
Details of the fiscal 2003 restructuring, site closures and other expenses were as follows:
| Cash/ | Original | Amount | Amount | Balance | ||||||||||||||||
| (In thousands) | Non-cash | Charge | Paid/Used | Adjusted | 9/30/02 | |||||||||||||||
Employee severance and outplacement |
Cash | $ | 6,196 | $ | (3,475 | ) | $ | (944 | ) | $ | 1,777 | |||||||||
Excess fixed assets |
Cash/non-cash | 567 | (567 | ) | — | — | ||||||||||||||
Total restructuring, site closures and
other expenses |
$ | 6,763 | $ | (4,042 | ) | $ | (944 | ) | $ | 1,777 | ||||||||||
During the March 2002 quarter, we recorded approximately $8.1 million for exit costs associated with the expansion of our Newport News, Virginia site to a larger facility in Newport News, consolidation of most of our United Kingdom facilities to Maidenhead, UK, and relocation of our Leiden, Netherlands operations to Dublin, Ireland, in efforts to consolidate our European support functions. These costs included approximately $5.8 million in rent remaining on the abandoned facilities and related exit costs, and $2.3 million in related abandoned fixed asset and leasehold improvement write-offs. These estimates were subsequently revised in the September 2002 quarter, resulting in a net reduction in the facility related accrual by approximately $1.1 million. As of September 30, 2002, we had an accrual of approximately $4.0 million outstanding related to rent and exit costs of the facilities.
Also during the March 2002 quarter, we recorded approximately $1.0 million for the costs of severance, related benefits and outplacement services, as we reorganized various operating functions. As a result, our workforce was reduced by 29 employees. As of September 30, 2002, all costs have been paid with the exception of an immaterial amount for related outplacement services.
During the December 2001 quarter, we recorded approximately $9.4 million for exit costs associated with the relocation of our North American support group from Eugene, Oregon to an expanded facility in Springfield, Oregon. These costs included approximately $6.7 million in rent remaining on the abandoned facilities in Eugene, Oregon and related exit costs, and $2.7 million in related abandoned leasehold improvement write-offs. These estimates were subsequently revised in the September 2002 quarter, resulting in an increase in the facility related accrual by approximately $0.2 million. As of September 30, 2002, we had an accrual of approximately $5.4 million outstanding related to rent and related exit costs of the facilities.
During the June 2001 quarter, we recorded approximately $2.0 million for the costs of employee severance, related benefits, outplacement services and abandonment of certain facilities primarily related to various restructurings as we continued the integration of AXENT into our operations. As a result, our workforce was reduced by 58 employees. These severance, related benefits, and outplacement costs were paid by the end of the September 2001 quarter. As of September 30, 2002, we had an accrual of approximately $0.1 million remaining related to the abandoned facilities.
13
SYMANTEC CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
Details of the fiscal 2002 restructuring and other expenses were as follows:
| Cash/ | Original | Amount | Amount | Balance | ||||||||||||||||
| (In thousands) | Non-cash | Charge | Paid/Used | Adjusted | 9/30/02 | |||||||||||||||
Employee severance and outplacement |
Cash | $ | 2,639 | $ | (2,573 | ) | $ | (41 | ) | $ | 25 | |||||||||
Excess facilities |
Cash/non-cash | 17,789 | (7,365 | ) | (904 | ) | 9,520 | |||||||||||||
Total restructuring, site closures and
other expenses |
$ | 20,428 | $ | (9,938 | ) | $ | (945 | ) | $ | 9,545 | ||||||||||
Note 10. Litigation and Contingencies
On June 14, 2002, Hark Chan and Techsearch LLC filed a lawsuit against us in the United States District Court for the Northern District of California, alleging that unspecified products sold on CD-ROM with Internet hyperlinks and/or with the LiveUpdate feature infringe a patent owned by Techsearch. The lawsuit requests damages, injunctive relief, costs and attorney fees. We intend to defend the action vigorously.
In May 2002, Craig Hughes filed a lawsuit in Utah state court, purportedly on behalf of a class of persons located in Utah who he asserts received unsolicited commercial email from us. The complaint alleges violation of Utah’s recently enacted Unsolicited Commercial Email Act. The lawsuit requests damages, costs and attorney fees. We intend to defend the action vigorously.
On December 23, 1999, Altiris Inc. filed a lawsuit against us in the United States District Court, District of Utah, alleging that unspecified Symantec products including Norton Ghost Enterprise Edition, infringed a patent owned by Altiris. The lawsuit requests damages, injunctive relief, costs and attorney fees. In October 2001, a stipulated judgment of non-infringement was entered following the court’s ruling construing the claims of the Altiris patent, and Altiris has appealed the ruling. We intend to defend the action vigorously.
In July 1998, the Ontario Court of Justice (General Division) ruled that we should pay a total of approximately $4.7 million for damages, plus interest, to Triolet Systems, Inc. and Brian Duncombe in a decade-old copyright action, for damages arising from the grant of a preliminary injunction against them. The damages were awarded following the court’s ruling that evidence presented later in the case showed the injunction was not warranted. We inherited this case through our acquisition of Delrina Corporation, which was the plaintiff in this lawsuit. Our appeal of the decision was denied, and we have requested leave to seek further review of that decision. We recorded a charge of approximately $5.8 million during the June 1998 quarter, representing the unaccrued portion of the judgment plus costs, and an additional charge of approximately $3.1 million for post-judgment interest and other costs during the March 2002 quarter. As of September 30, 2002, we believe that we have adequately accrued for both the damages and costs.
In October 1997, a complaint was filed in the United States District Court for the District of Utah on behalf of PowerQuest Corporation, against Quarterdeck, which we acquired in March 1999. The complaint alleges that Quarterdeck’s partitioning software, included in Partition-It and Partition-It Extra Strength, violated a patent held by PowerQuest. In January 1998, PowerQuest obtained a second patent relating to partitioning and has amended its complaint to allege infringement of that patent as well. The plaintiff has added us as a defendant and seeks an injunction against distribution of Partition-It and Partition-It Extra Strength and monetary damages. We intend to defend the action vigorously.
On September 15, 1997, Hilgraeve Corporation filed a lawsuit in the United States District Court, Eastern District of Michigan, against us, alleging that unspecified Symantec products infringe a patent owned by Hilgraeve. The lawsuit requests damages, injunctive relief, costs and attorney fees. In March 2000, the court granted our summary judgment motions and dismissed the case. In September 2001, the Court of Appeals for the Federal Circuit reversed the summary judgment and ordered the case returned to the District Court. We intend to defend the action vigorously.
Over the past few years, it has become common for software companies, including us, to receive claims of patent infringement. At any given time, we are evaluating claims of patent infringement asserted by several parties, with
14
SYMANTEC CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
respect to certain of our products. The outcome of any related litigation or negotiation could have a material adverse impact on our future results of operations or cash flows.
We are also involved in a number of other judicial and administrative proceedings that are incidental to our business. We intend to defend all of the aforementioned pending lawsuits vigorously and although adverse decisions (or settlements) may occur in one or more of the cases, the final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse affect on our financial condition, although it is not possible to estimate the possible loss or losses from each of these cases. Depending, however, on the amount and timing of an unfavorable resolution of these lawsuits, it is possible that our future results of operations or cash flows could be materially adversely affected in a particular period. We have accrued certain estimated legal fees and expenses related to certain of these matters; however, actual amounts may differ materially from those estimated amounts.
Note 11. Segment Information
Our operating segments are significant strategic business units that offer different products and services, distinguished by customer needs. We have five operating segments: Enterprise Security, Enterprise Administration, Consumer Products, Services and Other.
The Enterprise Security segment focuses on providing Internet security technology, global response and services necessary for organizations to manage their information security needs. The Enterprise Administration segment offers products that enable companies to be more effective and efficient within their information technology departments. The Consumer Products segment focuses on delivering our security and problem-solving products to individual users, home offices and small businesses. The Services segment is focused on providing information security solutions that incorporate best-of-breed technology, security expertise and global resources to help enable e-business success. The Other segment is comprised of sunset products and products nearing the end of their life cycle. Also included in the Other segment are all indirect costs, general and administrative expenses, amortization of goodwill (through March 31, 2002) and other intangible assets and charges that are one-time in nature, such as acquired in-process research and development, legal judgments and settlements and restructuring, site closures and other expenses which are not charged to the other operating segments.
15
SYMANTEC CORPORATION
Notes to Condensed Consolidated Financial Statements, continued
The following table summarizes each segment’s net revenues from external customers, operating income (loss), and depreciation and amortization expense:
| Enterprise | Enterprise | Consumer | Total | |||||||||||||||||||||
| (In thousands; unaudited) | Security | Administration | Products | Services | Other | Company | ||||||||||||||||||
Three Months Ended |
||||||||||||||||||||||||
September 30, 2002 |
||||||||||||||||||||||||
Revenue from
external customers |
$ | 141,940 | $ | 52,602 | $ | 123,945 | $ | 6,112 | $ | 632 | $ | 325,231 | ||||||||||||
Operating income (loss) |
26,703 | 38,723 | 58,300 | (4,988 | ) | (48,346 | ) | 70,392 | ||||||||||||||||
Depreciation &
amortization expense |
3,090 | 93 | 769 | 758 | 19,244 | 23,954 | ||||||||||||||||||
Three Months Ended |
||||||||||||||||||||||||
September 30, 2001 |
||||||||||||||||||||||||
Revenue from
external customers |
109,051 | 53,487 | 73,696 | 3,031 | 3,107 | 242,372 | ||||||||||||||||||
Operating income (loss) |
27,744 | 38,126 | 17,662 | (5,344 | ) | (84,939 | ) | (6,751 | ) | |||||||||||||||
Depreciation &
amortization expense |
1,557 | 57 | 383 | 88 | 60,970 | 63,055 | ||||||||||||||||||
Six Months Ended |
||||||||||||||||||||||||
September 30, 2002 |
||||||||||||||||||||||||
Revenue from
external customers |
273,825 | 108,441 | 247,847 | 9,787 | 1,372 | 641,272 | ||||||||||||||||||
Operating income (loss) |
54,225 | 79,800 | 119,612 | (9,818 | ) | (95,437 | ) | 148,382 | ||||||||||||||||
Depreciation &
amortization expense |
5,630 | 193 | 1,711 | 987 | 36,158 | 44,679 | ||||||||||||||||||
Six Months Ended |
||||||||||||||||||||||||
September 30, 2001 |
||||||||||||||||||||||||
Revenue from
external customers |
206,721 | 112,963 | 138,839 | 5,341 | 6,544 | 470,408 | ||||||||||||||||||
Operating income (loss) |
42,485 | 79,545 | 28,992 | (10,459 | ) | (168,540 | ) | (27,977 | ) | |||||||||||||||
Depreciation &
amortization expense |
4,016 | 168 | 1,101 | 192 | 123,581 | 129,058 | ||||||||||||||||||
Geographical Information
| Three Months Ended | Six Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| (In thousands; unaudited) | 2002 | 2001 | 2002 | 2001 | |||||||||||||
Net revenues from external customers: |
|||||||||||||||||
United States |
$ | 171,917 | $ | 136,920 | $ | 338,089 | $ | 258,036 | |||||||||
Other foreign countries |
153,314 | 105,452 | 303,183 | 212,372 | |||||||||||||
| $ | 325,231 | $ | 242,372 | $ | 641,272 | $ | 470,408 | ||||||||||
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discussion contains forward-looking statements which are subject to safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. The words “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “continue” and similar expressions identify forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking statements. These statements are only predictions, based on our current expectations about future events. We cannot guarantee future results, performance or achievements or that predictions or current expectations will be accurate. We do not undertake any obligation to update these forward-looking statements to reflect events occurring or circumstances arising after the date of this report, except as required by applicable law. These forward-looking statements involve risks and uncertainties, and our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including those that we discuss under Business Risk Factors beginning on page 24. We encourage you to read that section carefully.
All Symantec share and per share amounts in this Form 10-Q have been adjusted to reflect the two-for-one stock split effected as a stock dividend, which became effective January 31, 2002.
OVERVIEW
Symantec, a world leader in Internet security technology, provides a broad range of content and network security software and appliance solutions to enterprises, individuals and service providers. We are a leading provider of client, gateway and server security solutions for virus protection, firewall and virtual private network, vulnerability management, intrusion detection, Internet content and e-mail filtering, and remote management technologies and security services to enterprises and service providers around the world. Founded in 1982, we have offices in 38 countries worldwide.
Critical Accounting Policies
We believe there have been no significant changes in our critical accounting policies during the six months ended September 30, 2002 as compared to what was previously disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended March 31, 2002.
Recent Events
During the September 2002 quarter, we acquired the following four privately-held companies for approximately $375.2 million in cash:
| Riptech, Inc. is a provider of scalable, real-time managed security services that protect clients through advanced outsourced security monitoring and professional services. | |
| Recourse Technologies, Inc. is a provider of security threat management solutions that detect, analyze and respond to both known and novel threats, including intrusions, internal attacks and denial of service attacks. | |
| SecurityFocus Inc. is a provider of enterprise security threat management systems, providing global early warning of cyber attacks, customized and comprehensive threat alerts, and countermeasures to prevent attacks before they occur. | |
| Mountain Wave, Inc. is a provider of automated attack sensing and warning software and services for real-time enterprise security operations management. |
As a result of these acquisitions, we recorded approximately $4.7 million for acquired in-process research and development, $40.5 million for developed technology and acquired product rights, $308.7 million for goodwill, $4.3 million for other intangibles, $19.3 million for net deferred tax assets and $6.6 million for tangible assets, net of liabilities. We expect our operating expenses to increase in future periods. At least initially, we expect the increase in our operating expenses to exceed the revenues attributed to these acquired companies, and that as a result, these acquisitions will be dilutive to net income as we integrate the operations, products and services of these companies into our own offerings and continue to develop these offerings.
17
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 our condensed consolidated statements of operations as a percentage of net revenues and the percentage change in the total amount of each item for the periods indicated:
| Three Months | Six Months | |||||||||||||||||||||||||
| Ended | Percent | Ended | Percent | |||||||||||||||||||||||
| September 30, | Change | September 30, | Change | |||||||||||||||||||||||
| in Dollar | in Dollar | |||||||||||||||||||||||||
| (Unaudited) | 2002 | 2001 | Amounts | 2002 | 2001 | Amounts | ||||||||||||||||||||
Net revenues |
100 | % | 100 | % | 34 | % | 100 | % | 100 | % | 36 | % | ||||||||||||||
Cost of revenues |
19 | 19 | 34 | 18 | 19 | 29 | ||||||||||||||||||||
Gross margin |
81 | 81 | 34 | 82 | 81 | 38 | ||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||
Research and development |
15 | 17 | 18 | 15 | 17 | 17 | ||||||||||||||||||||
Sales and marketing |
38 | 42 | 22 | 37 | 43 | 18 | ||||||||||||||||||||
General and administrative |
5 | 5 | 52 | 5 | 5 | 39 | ||||||||||||||||||||
Amortization of goodwill |
— | 20 | * | — | 21 | * | ||||||||||||||||||||
Amortization of other intangibles
from acquisitions |
— | — | * | — | — | * | ||||||||||||||||||||
Acquired in-process research and
development |
1 | — | * | 1 | — | * | ||||||||||||||||||||
Restructuring, site closures and
other |
— | — | * | 1 | 1 | 138 | ||||||||||||||||||||
Total operating expenses |
59 | 84 | (5 | ) | 59 | 87 | (8 | ) | ||||||||||||||||||
Operating income (loss) |
22 | (3 | ) | (1,143 | ) | 23 | (6 | ) | (630 | ) | ||||||||||||||||
Interest income |
3 | 3 | 32 | 3 | 3 | 30 | ||||||||||||||||||||
Interest expense |
(2 | ) | — | * | (2 | ) | — | * | ||||||||||||||||||
Income, net of expense, from sale of
technologies and product lines |
1 | 2 | (47 | ) | 1 | 2 | (47 | ) | ||||||||||||||||||
Other expense, net |
— | — | * | — | — | * | ||||||||||||||||||||
Income (loss) before income taxes |
24 | 2 | * | 25 | (1 | ) | * | |||||||||||||||||||
Provision for income taxes |
8 | 7 | 54 | 8 | 6 | 87 | ||||||||||||||||||||
Net income (loss) |
16 | % | (5 | )% | (540 | ) | 17 | % | (7 | )% | (429 | ) | ||||||||||||||
* Percentage change is not meaningful
Net Revenues
Net revenues increased 34% to $325.2 million during the September 2002 quarter from $242.4 million during the September 2001 quarter. Net revenues increased 36% to $641.3 million during the six months ended September 30, 2002 from $470.4 million during the six months ended September 30, 2001. This increase was due primarily to increased sales of our enterprise security products and consumer products. The increased sales of our enterprise security products and consumer products is largely attributable to continuing growth in demand for our virus protection solutions from large organizations as well as from small businesses and consumers. From a regional standpoint, the increase was primarily due to growth in net revenues internationally and, to a lesser extent, in the United States. Strength in major foreign currencies during the September 2002 quarter and six months ended September 2002 also positively impacted our international revenue growth.
Segments
Our Enterprise Security segment provides organizations with Internet security technology, global response and services to manage their information security needs. Our Enterprise Security segment represented approximately
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
44% and 45% of net revenues during the September 2002 and 2001 quarters, respectively, and 43% and 44% of net revenues during the six months ended September 30, 2002 and 2001, respectively. Net revenues increased approximately $32.9 million, or 30%, during the September 2002 quarter as compared to the September 2001 quarter and $67.1 million, or 32%, during the six months ended September 30, 2002 as compared to the six months ended September 30, 2001. These increases were primarily due to strong growth in sales of our virus protection and firewall/VPN product solutions.
Our Enterprise Administration segment offers products that enable companies to be more effective and efficient within their information technology departments. Our Enterprise Administration segment represented approximately 16% and 22% of net revenues during the September 2002 and 2001 quarters, respectively, and 17% and 24% of net revenues during the six months ended September 30, 2002 and 2001, respectively. Net revenues decreased by approximately $0.9 million, or 2%, during the September 2002 quarter as compared to the September 2001 quarter and $4.5 million, or 4%, during the six months ended September 30, 2002 as compared to the six months ended September 30, 2001. This decrease was due to a decline in sales of our pcAnywhere product, partially offset by growth in our Ghost Corporate Edition product. The decline in sales of our pcAnywhere product was, and may continue to be, the result of a decrease in sales to small businesses and home offices and to corporate customers.
Our Consumer Products segment provides security and problem-solving products to individual users, home offices and small businesses. Our Consumer Product segment represented approximately 38% and 30% of net revenues during the September 2002 and 2001 quarters, respectively, and 39% and 30% of net revenues during the six months ended September 30, 2002 and 2001, respectively. Net revenues increased by approximately $50.2 million, or 68%, during the September 2002 quarter as compared to the September 2001 quarter and $109.0 million, or 79%, during the six months ended September 30, 2002 as compared to the six months ended September 30, 2001. This increase was primarily related to stronger than expected consumer and small business spending, which contributed to the increase in sales of our Norton AntiVirus, Norton System Works and Norton Internet Security products. Our electronic distribution channel, including original equipment manufacturer subscription renewals, also contributed to the increase in sales during the September 2002 quarter and the six months ended September 30, 2002. While this segment’s net revenues have been seasonally lower in the June and September quarters than the previous March quarter over the last three years, the June and September 2002 quarters were only slightly lower than the March 2002 quarter, by approximately $2.0 million, or 2%, each.
Our Services segment provides information security solutions that incorporate best-of-breed technology, security expertise and global resources to help enable e-business success. Our Services segment represented approximately 2% and 1% of net revenues during each of the September 2002 and 2001 quarters, respectively, and during the six months ended September 30, 2002 and 2001, respectively. Net revenues increased $3.1 million, or 102%, during the September 2002 quarter as compared to the September 2001 quarter and $4.4 million, or 83%, during the six months ended September 30, 2002 as compared to the six months ended September 30, 2001.
Our Other segment is comprised of sunset products and products nearing the end of their life cycle and represented less than 1% and approximately 1% of net revenues during each of the September 2002 and 2001 quarters, respectively, and during the six months ended September 30, 2002 and 2001, respectively.
International
Net revenues from sales outside of the United States were approximately $153.3 million and $105.5 million during the September 2002 and 2001 quarters, respectively, and $303.2 million and $212.4 million during the six months ended September 2002 and 2001, respectively. As a percentage of net revenues, sales outside of the United States represented approximately 47% and 44% during the September 2002 and 2001 quarters, respectively, and 47% and 45% during the six months ended September 30, 2002 and 2001, respectively. The increase in absolute dollars during the September 2002 quarter as compared to the September 2001 quarter and the six months ended September 30, 2002 as compared to the six months ended September 30, 2001 was primarily the result of sales growth in Europe and to a lesser extent in Japan and Canada.
Strength in major foreign currencies during the September 2002 quarter as compared to the average major foreign currency rates during the September 2001 quarter positively impacted our international revenue growth by approximately $11.0 million. In addition, strength in major foreign currencies during the six months ended September 30, 2002, as compared to the average major foreign currency rate changes during the six months ended
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
September 30, 2001, positively impacted our international revenue growth by approximately $17.8 million. We are unable to predict the extent to which revenues in future periods will be impacted by changes in foreign currency rates. We expect that to the extent that international sales become a greater proportion of our total sales in the future, changes in foreign exchange rates will have a potentially greater impact on our revenues and operating results.
Gross Margin
Gross margin represents net revenues less cost of revenues. Cost of revenues consists primarily of manufacturing expenses, costs for producing manuals and CDs, packaging costs, royalties paid to third parties under publishing contracts, costs of consulting services, technical support costs and amortization of acquired product rights.
Gross margin remained flat at approximately 81% of net revenues during each of the September 2002 and 2001 quarters and 82% and 81% of net revenues during the six months ended September 30, 2002 and 2001, respectively. This slightly higher increase during the six months ended September 30, 2002 as compared to the six months ended September 30, 2001 was primarily due to a reduction in our technical support costs and amortization of acquired products rights as a percentage of net revenues. This was partially offset by an increase in royalty, obsolescence reserves and consulting service costs. Costs of consulting services increased with the increase in consulting services revenues and our consulting services typically have lower margins than our products.
Research and Development Expenses
Research and development expenses as a percentage of net revenues were approximately 15% and 17% during the September 2002 and 2001 quarters, respectively, and during the six months ended September 30, 2002 and 2001, respectively. The decrease in research and development expenses as a percentage of net revenues was attributed to the disproportionate growth in net revenues of 34% and 36% during the September 2002 quarter and six months ended September 30, 2002, respectively, as compared to growth in research and development expenses of 18% and 17% during the September 2002 quarter and six months ended September 30, 2002, respectively. In absolute dollars, research and development expenses increased 18% to approximately $47.3 million during the September 2002 quarter from $40.0 million during the September 2001 quarter and 17% to approximately $92.8 million during the six months ended September 30, 2002 from $79.5 million during the six months ended September 30, 2001. This increase was primarily a result of increased headcount, salary increases, increased infrastructure related expenditures and increased research and development expenses associated with the newly acquired companies during the September 2002 quarter.
Sales and Marketing Expenses
Sales and marketing expenses as a percentage of net revenues were approximately 38% and 42% during the September 2002 and 2001 quarters, respectively, and 37% and 43% during the six months ended September 30, 2002 and 2001, respectively. The decrease in sales and marketing expenses as a percentage of net revenues was attributed to the disproportionate growth in net revenues of 34% and 36% during the September 2002 quarter and six months ended September 30, 2002, respectively, as compared to growth in sales and marketing expenses of 22% and 18% during the September 2002 quarter. In absolute dollars, sales and marketing expenses increased 22% to approximately $124.9 million during the September 2002 quarter from $102.4 million during the September 2001 quarter and 18% to approximately $240.1 million during the six months ended September 30, 2002 from $203.6 million during the six months ended September 30, 2001. This increase was primarily a result of increased headcount, salary increases, higher commission expenses due to the increase in sales, increased advertising and promotion expenses, increased travel and entertainment expenses and increased sales and marketing expenses associated with the newly acquired companies during the September 2002 quarter.
General and Administrative Expenses
General and administrative expenses as a percentage of net revenues remained flat at approximately 5% during each of the September 2002 and 2001 quarters and the six months ended September 30, 2002 and 2001. General and administrative expenses increased 52% to approximately $17.3 million during the September 2002 quarter from $11.3 million during the September 2001 quarter and 39% to $32.6 million during the six months ended September 30, 2002 from $23.4 million during the six months ended September 30, 2001. This increase was primarily a result of increased headcount, salary increases, increased infrastructure related expenditures, increased legal fees and
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
increased general and administrative expenses associated with the newly acquired companies during the September 2002 quarter.
Amortization of Goodwill and Other Intangibles From Acquisitions
Amortization of goodwill and other intangibles from acquisitions decreased 99% to approximately $0.7 million during the September 2002 quarter from $50.0 million during the September 2001 quarter and to $1.2 million during the six months ended September 30, 2002 from $99.5 million during the six months ended September 30, 2001. This decrease was due to the adoption of Statement of Financial Accounting Standards, or SFAS, No. 142 on April 1, 2002, under which the carrying values of goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to an annual impairment test.
Acquired In-process Research and Development
Acquired in-process research and development was $4.7 million during the three and six months ended September 30, 2002, due to the Riptech, SecurityFocus and Recourse acquisitions. We recorded no acquired in-process research and development during the three and six months ended September 30, 2001.
The purchase price of the three September 2002 quarter transactions was allocated to the acquired assets and liabilities based on the estimated fair values as of the date of the acquisition. We wrote off $4.7 million of acquired in-process research and development, because the acquired technologies had not reached technological feasibility and had no alternative uses.
The efforts required to develop the acquired in-process technology principally relate to the completion of all planning, design, development and test activities that are necessary to establish that the product or service can be produced to meet its design specifications, including features, functions and performance. We expect the acquired in-process technology to be developed into commercially feasible products. However, there are no assurances that this will occur. If we fail to complete these products in their entirety, or in a timely manner, we may not continue to attract new users, we may be unable to retain our existing users and the value of the other intangible assets may become impaired.
We determined the fair value of the acquired in-process technology for each of the purchases by estimating the projected cash flows related to these projects and future revenues to be earned upon commercialization of the products. We discounted the resulting cash flows back to their net present values. We based the net cash flows from such projects on our analysis of the respective markets and estimates of revenues and operating profits related to these projects.
A valuation specialist used our estimates to establish the amount of acquired in-process research and development to be written-off for these acquisitions during the September 2002 quarter. As a result, we wrote off $2.1 million, $1.6 million and $1.0 million in connection with our acquisitions of Riptech, SecurityFocus and Recourse, respectively.
Riptech
The in-process technology acquired in the Riptech acquisition consisted primarily of research and development related to the fourth generation of its Caltarian technology, which provides real-time information protection through around-the-clock monitoring, analysis and response. We will integrate this technology into our managed security services.
SecurityFocus
The in-process technology acquired in the SecurityFocus acquisition consisted primarily of research and development related to new versions of DeepSight Threat Management System (TMS) and DeepSight Analyzer (Analyzer) products, which are threat management systems that provide early warnings of attack, as well as countermeasures to defend these attacks. We will integrate this technology into our vulnerability management products.
Recourse
The in-process technology acquired in the Recourse acquisition consisted primarily of research and development related to new versions of ManHunt, a network intrusion detection system. We will integrate this technology into our intrusion detection products.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Restructuring, Site Closures and Other
During the September 2002 quarter, restructuring, site closures and other resulted in a net reduction of expenses of approximately $1.2 million. We recorded a reduction of approximately $2.2 million in costs previously recognized in connection with severance and facility related estimates associated primarily with the restructuring and relocation of our Leiden, Netherlands operations to Dublin, Ireland, and the consolidation of most of our United Kingdom facilities to Maidenhead, UK. This reduction of expenses was offset by approximately $0.3 million in estimated expenses for certain fiscal 2002 restructuring and site closures and $0.7 million for costs of severance, related benefits and outplacement services associated with the reduction in operations of our San Antonio, Texas site. As a result of our San Antonio restructuring, our workforce was reduced by 51 employees.
We recorded no restructuring, site closures and other expenses during the September 2001 quarter.
Restructuring, site closures and other increased 138% to approximately $4.9 million during the six months ended September 30, 2002 from $2.0 million during the six months ended September 30, 2001. During the six months ended September 30, 2002, we recorded approximately $5.8 million for costs of severance, related benefits, outplacement services and abandonment of certain fixed assets primarily associated with the Leiden, Netherlands, relocation to Dublin, Ireland, the outsourcing of our North American and European consumer support functions and the reduction in operations in San Antonio, Texas. As a result, our workforce was reduced by 302 employees. This expense was offset by a net reduction in expenses of $0.9 million, due to revised estimates of certain fiscal 2002 facility related expenses.
During the June 2001 quarter, we recorded approximately $2.0 million for the costs of employee severance, related benefits, outplacement services and abandonment of certain facilities primarily related to the former AXENT operations. As a result, our workforce was reduced by 58 employees.
Interest Income, Interest Expense and Other Expense
Interest income was approximately $9.7 million and $7.4 million during the September 2002 and 2001 quarters, respectively, and $19.4 million and $15.0 million during the six months ended September 30, 2002 and 2001, respectively. The increase was due to higher average invested cash balances during the September 2002 quarter and six months ended September 30, 2002 as compared to the same periods during fiscal 2002, partially offset by lower average interest rates.
Interest expense of approximately $5.3 million during the September 2002 quarter and $10.6 million during the six months ended September 30, 2002 was related to the 3% convertible subordinated debentures issued in October 2001. We recorded no interest expense during the September 2001 quarter and six months ended September 30, 2001.
Other expense, net was insignificant during the September 2002 and 2001 quarters and six months ended September 30, 2002 and 2001.
Income, Net of Expense, From Sale of Technologies and Product Lines
Income, net of expense, from sale of technologies and product lines was approximately $2.4 million and $4.6 million during the September 2002 and 2001 quarters, respectively, and $4.7 million and $8.9 million during the six months ended September 30, 2002 and 2001, respectively. This income was related primarily to royalty payments received, as a result of the divestiture of our ACT! product line in December 1999, from Interact Commerce Corporation, which subsequently merged with The Sage Group plc.
Income Tax Provision
Our effective tax rate on income before restructuring, site closures and other expenses, amortization of goodwill and deduction for acquired in-process research and development was 32% during the six months ended September 30, 2002 and 2001. This effective tax rate was lower than the U.S. federal and state combined statutory rate primarily due to a lower statutory tax rate on income generated by our Irish operations.
Our overall effective tax rate was 32% on pre-tax income for the six months ended September 30, 2002. The effective tax rate for the six months ended September 30, 2002 is lower than the U.S. federal and state combined statutory rate primarily due to a lower statutory tax rate on income generated by our Irish operations. Our effective
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
tax rate for the six months ended September 30, 2001 reflects the nondeductibility of substantially all of the goodwill amortization.
Selected Pro Forma Financial Data
For comparative purposes, the following table displays, on a pro forma basis, our results of operations excluding all acquisition related amortization and one-time charges. These measures are not in accordance with, or an alternative for, generally accepted accounting principles, or GAAP, and may be different from pro forma measures used by other companies.
| Three Months Ended | Six Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (In thousands, except per share data; unaudited) | 2002 | 2001 | 2002 | 2001 | ||||||||||||
Net income (loss) |
$ | 51,994 | $ | (11,812 | ) | $ | 108,563 | $ | (33,030 | ) | ||||||
Amortization of goodwill |
— | 49,416 | — | 98,396 | ||||||||||||
Acquisition related amortization |
7,346 | 8,255 | 14,211 | 16,705 | ||||||||||||
Acquired in-process research and development |
4,700 | — | 4,700 | — | ||||||||||||
Restructuring, site closures and other |
(1,179 | ) | — | 4,874 | 2,046 | |||||||||||
Income tax benefit |
(3,021 | ) | (3,562 | ) | (6,883 | ) | (7,942 | ) | ||||||||
Pro forma net income |
$ | 59,840 | $ | 42,297 | $ | 125,465 | $ | 76,175 | ||||||||
Pro forma net income per share — diluted |
$ | 0.38 | $ | 0.28 | $ | 0.79 | $ | 0.50 | ||||||||
Shares used to compute pro forma net income
per share — diluted |
168,489 | 150,416 | 168,743 | 152,862 | ||||||||||||
For the September 2001 quarter and six months ended September 30, 2001, shares used to compute pro forma net income per share (diluted) include approximately 4.6 million and 6.7 million shares, respectively, issuable from the assumed exercise of outstanding options.
Liquidity and Capital Resources
Our principal source of liquidity is our cash, cash equivalents and short-term investments, as well as the cash that we generate over time from our operations. Cash, cash equivalents and short-term investments decreased approximately $205.6 million to $1.2 billion at September 30, 2002 from $1.4 billion at March 31, 2002. This decrease is primarily due to cash paid for the companies we acquired in the September 2002 quarter, repurchase of common stock and capital expenditures. The cash used by these factors was partially offset by cash provided from operations and net proceeds from the exercise of stock options and sales of common stock through our employee stock purchase plan.
Net cash provided by operating activities during the six months ended September 30, 2002 was approximately $192.3 million compared with $117.5 million during the six months ended September 30, 2001. During the six months ended September 30, 2002, net cash provided by operating activities was comprised primarily of net income of approximately $108.6 million, net non-cash related expenses of $54.0 million and an increase of $29.7 million in liabilities, net of the increase in assets. During the six months ended September 30, 2001, net cash provided by operating activities was comprised primarily of non-cash related expenses of $133.4 million and an increase of $17.1 million in liabilities, net of the increase in assets, offset by a net loss of approximately $33.0 million.
Net trade accounts receivable increased by $64.9 million to approximately $154.1 million at September 30, 2002 from $89.2 million at March 31, 2002. The increase in net trade accounts receivable is primarily due to higher sales in the month of September 2002 as compared to the month of March 2002 and an unusually low net trade accounts receivable balance at March 31, 2002.
Net cash used in investing activities during the six months ended September 30, 2002 was approximately $276.5 million compared with $38.7 million during the six months ended September 30, 2001. During the six months ended September 30, 2002, net cash used in investing activities was comprised primarily of $367.5 million for acquisition related costs and $42.6 million of capital expenditures, offset by $133.6 million in net proceeds from marketable
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
securities and other investments. During the six months ended September 30, 2001, net cash used in investing activities was comprised primarily of $45.0 million of capital expenditures and $5.2 million of acquisition related costs, offset by $11.7 million of net proceeds from marketable securities and other investments.
Net cash used in financing activities during the six months ended September 30, 2002 was approximately $32.5 million compared with $141.7 million during the six months ended September 30, 2001. During the six months ended September 30, 2002, net cash used in financing activities was comprised primarily of $64.3 million for repurchases of common stock, offset by $31.8 million in net proceeds from the exercise of stock options and sales of common stock through our employee stock purchase plan. During the six months ended September 30, 2001, net cash used in financing activities was comprised primarily of $204.4 million for repurchases of common stock, offset by $62.7 million in net proceeds from the exercise of stock options and sales of common stock through our employee stock purchase plan.
On January 16, 2001, the Board of Directors replaced an earlier stock repurchase program with a new authorization to repurchase up to $700.0 million of Symantec common stock, not to exceed 30.0 million shares, with no expiration date. As of the end of the September 2002 quarter, we had repurchased a total of 21.9 million shares at prices ranging from $17.78 to $29.97 per share, for an aggregate amount of approximately $513.2 million. During the September 2002 quarter, we repurchased 2.2 million shares at prices ranging from $27.93 to $29.97 per share, for an aggregate amount of approximately $64.3 million. During the September 2001 quarter, we repurchased 9.6 million shares at prices ranging from $17.78 to $24.50 per share, for an aggregate amount of approximately $204.4 million. No shares were repurchased during the June 2002 or 2001 quarters.
On October 24, 2001, we completed a private offering of $600 million of 3% convertible subordinated debentures due November 1, 2006, the net proceeds of which were $584.6 million. The debentures are convertible into shares of our common stock by the holders at any time before maturity at a conversion price of $34.14 per share, subject to certain adjustments. We may redeem the debentures on or after November 5, 2004, at a redemption price of 100.75% of stated principal during the period November 5, 2004 through October 31, 2005 and 100% thereafter. Interest is paid semi-annually and we commenced making these payments on May 1, 2002. We intend to use the net proceeds of the offering for general corporate purposes, including working capital, potential acquisitions, stock repurchases and investments in our infrastructure.
We believe that existing cash, cash equivalents and short-term investments, as well as cash generated from operating results will be sufficient to fund operations for at least the next year.
SYNTHETIC LEASES
We currently have two real estate leasing arrangements that we have classified as operating leases.
One of the lease arrangements is for two existing office buildings in Cupertino, California. Lease payments for these facilities are based on the three-month LIBOR in effect at the beginning of each fiscal quarter plus a specified margin. We have the right to acquire the related properties at any time during the seven-year lease period ending February 1, 2006. If, at the end of the lease term we do not renew the lease, purchase the properties or arrange for a third party to purchase the properties, we may be obligated to the lessor for all or some portion of an amount up to the guaranteed residual amount of approximately $66.0 million, representing approximately 84% of the lessor’s purchase price of the property.
The second lease arrangement is for land and the construction of two office buildings, one in Newport News, Virginia and another in Springfield, Oregon. Our lease payments are based on one-, three- or six-month LIBOR plus a specified margin. We have the right to acquire the related properties at any time during the six and one-half year lease period ending September 28, 2007. We moved into the Oregon facility immediately after the end of the December 2001 quarter and into the Virginia facility in April 2002. If, at the end of the lease term we do not renew the lease, purchase the properties or arrange for a third party to purchase the properties, we may be obligated to the lessor for all or some portion of an amount up to the guaranteed residual amount of approximately $40.0 million, representing approximately 85% of the lessor’s purchase price of the properties.
As security for each of these arrangements, we are required to maintain a cash collateral balance, the aggregate amount of which was $118.5 million at September 30, 2002. We are required to invest the cash collateral in U.S.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
Treasury securities or certificates of deposit with specified lenders and maturities not to exceed two to three years. In accordance with the lease terms, these funds are not available to meet operating cash requirements. As of September 30, 2002, the investments related to the California lease totaled approximately $71.3 million and the investments related to the Oregon and Virginia leases totaled approximately $47.2 million. These amounts are classified as non-current restricted investments within the financial statements.
In addition, we are obligated to maintain certain financial covenants including a minimum cash balance, tangible net worth and quarterly earnings before income tax, depreciation and amortization, or EBITDA, and a maximum debt and senior debt to EBITDA ratio. Future acquisitions, financing activities or operating losses may cause us to be in violation of these financial covenants. In the event of default, we may be required to release the cash collateral and take possession of the buildings. As of September 30, 2002, we were not in compliance with certain financial covenants and, as such, obtained the appropriate waivers.
RECENT ACCOUNTING PRONOUNCEMENTS
The lessors associated with lease agreements relating to certain of our facilities, described under Synthetic Leases above, are special purpose entities or equivalent structures. Presently, we account for these leases as operating leases, while the special purpose entities or equivalent structures own and account for the leased assets and related liabilities in their records. In July 2002, the Financial Accounting Standards Board, or FASB, issued a proposed interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, that addresses the consolidation of special purpose entities. The proposed interpretation provides guidance for determining when an entity (such as us), the primary beneficiary, should consolidate another entity, a special purpose entity or equivalent structure (such as the lessor), that functions to support the activities of the primary beneficiary. The expected proposed interpretation may result in us having to consolidate the financial position and operating results of the special purpose entities and equivalent structures, which are the lessors under the aforementioned operating lease agreements. The effective date of these proposed new rules could be as early as the beginning of our fiscal year ending March 31, 2004, and immediately for any new leases which utilize special purpose entities or equivalent structures entered into after the new rules’ effective date.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that the liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than when a commitment is made to an exit or disposal plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect the adoption of this statement to have a material effect on our financial position or results of operations.
BUSINESS RISK FACTORS
There is uncertainty as to whether or not we will be able to sustain the growth rates in sales of our products, particularly in consumer antivirus protection products. During the second half of fiscal 2002 and first half of fiscal 2003, we experienced a higher than expected rate of growth in sales of our consumer antivirus protection products, and we expect that we will not be able to sustain this high growth rate on a consistent basis going forward. We believe that consumer antivirus sales have been spurred by a number of factors over the past four quarters, including increased broadband connection, increased awareness of security threats to consumer systems, particularly the well-publicized Code Red, Nimda, Klez and Bugbear threats and a reaction from the September 11, 2001 terrorist attacks. The impact of those factors is likely to diminish over time, and it is possible that growth rates in sales of antivirus protection products may decline.
We have grown, and may continue to grow, through acquisitions, which give rise to a number of risks that could have adverse consequences for our future operating results. We completed four acquisitions during the September 2002 quarter and will likely pursue future acquisitions. Integrating acquired businesses has been and will continue to be a complex, time consuming and expensive process. To integrate acquired businesses, we must implement our technology systems in the acquired operations and assimilate and manage the personnel of the acquired operations. Our success in completing the integration of acquired businesses may impact the market acceptance of such acquisitions. Further, the difficulties of integrating acquired businesses could disrupt our ongoing business, distract our management focus from other opportunities and challenges, and increase our expenses and
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
working capital requirements. Our recent acquisitions have resulted in, and acquisitions we complete in the future may also cause us to recognize, substantial amounts of goodwill that will be subject to an annual, or if events require, a more frequent impairment test and other intangible assets that will be amortized and also subject to impairment testing. In addition, acquisitions may result in substantial restructuring and other related expenses and write-offs of acquired in-process research and development costs. Further, we may need to issue equity or incur additional debt to finance future acquisitions, which could be dilutive to our existing stockholders or could increase our leverage. Any of these and other factors could harm our ability to achieve anticipated levels of profitability from acquired operations or to realize other anticipated benefits of an acquisition.
Introduction and integration of new products may adversely affect our financial results. We have recently introduced new products, including newly acquired products from our acquisitions. Examples of these acquired products are DeepSight Threat Management System, DeepSight Analyzer products, ManHunt and ManTrap. These products may not achieve market acceptance and/or may not be able to compete with products either currently in the market or introduced in the future. As a result, there may be a negative impact on our revenues and operating income.
Economic and political conditions and conditions affecting the network security market in particular may have a negative impact on our revenues and margins. The market for our products depends on economic conditions affecting the broader network security, Internet infrastructure and related markets. More generally, the slowdown in the U.S. economy may hurt consumer demand for our services. On the enterprise side, the continued slowdown in corporate earnings and tightening of corporate budgets may cause potential customers to delay or cancel security projects, reduce their overall or security-specific information technology budgets, or reduce or cancel orders for our products. Further, in this environment, customers may experience financial difficulty, cease operations or fail to budget for the purchase of our products. This, in turn, may lead to longer sales cycles, delays in payment and collection, and price pressures, causing us to realize lower revenues and margins. In addition, the terrorist acts of September 11, 2001 created an uncertain economic and political environment in many parts of the world, and we cannot predict the impact of these events, or of any related military action, on our customers or business.
Demand for our products is subject to seasonal trends. Although there is no assurance this trend will continue, our sales of consumer products over the last six years have been seasonal, with higher sales generally in our December and March quarters. In addition, we anticipate that sales of enterprise security products may be higher in the March quarter in the future, as our sales force attempts to close transactions before the end of our fiscal year. To the extent seasonality makes it more difficult to predict our revenues and value our business, our stock price may suffer and the volatility of our stock may increase.
Piracy of our software may have a significant impact on our net revenues. While we are unable to determine the exact extent of piracy of our software products, software piracy may depress our net revenues. While this would adversely affect domestic revenue, revenue loss is believed to be even more significant outside of the United States, particularly in countries where laws are less protective of intellectual property rights. We engage in efforts to educate consumers on the benefits of licensing genuine products and to educate lawmakers on the advantages of a business climate where intellectual property rights are protected, and we cooperate with the Business Software Alliance in their efforts to combat piracy. However, such continued efforts may not be successful in preventing piracy of our products from occurring.
Our sales of enterprise-wide site licenses may adversely affect our financial results. Sales of enterprise-wide site licenses through our Enterprise Security segment represent a major portion of our business. Enterprise licensing arrangements involve a longer sales cycle than sales through other distribution channels, require greater investment of resources in establishing the enterprise relationship and can sometimes result in lower operating margins. The timing of the execution of volume licenses, or their nonrenewal or renegotiation by large customers, could cause our results of operations to vary significantly from quarter to quarter and could have a material adverse impact on our results of operations.
The trend toward consolidation in the software industry could impede our ability to compete effectively. Consolidation is underway among companies in the software industry as firms seek to offer more extensive suites of software products and broader arrays of software solutions. Changes resulting from this consolidation may negatively impact our competitive position. In addition, to the extent that we seek to expand our product lines and skills and
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
capacity through acquisitions, the trend toward consolidation may result in our encountering competition, and paying higher prices, for acquired businesses.
Our markets are competitive and our operating results and financial condition could be adversely affected if we are unable to anticipate or react to this competition. Our markets are competitive. If we are unable to anticipate or react to this competition, our operating results could be adversely affected by reducing our sales or the prices we can charge for our products. In the recent past, many of our competitors have significantly lowered the price of their products and we may have to do the same to remain competitive. Our ability to remain competitive depends, in part, on our ability to enhance our products or develop new products that are compatible with new hardware and operating systems. We have no control over, and limited insight into, development efforts by third parties with respect to new hardware and operating systems, and we may not respond effectively or timely to such changes in the market. In addition, we have limited resources and we must make strategic decisions as to the best allocation of our resources to position ourselves for changes in our markets. We may from time to time allocate resources to projects or markets that do not develop as rapidly or fully as we expect. We may fail to allocate resources to third party products, to markets or to business models that are more successful than we anticipate.
Our software products and web site may be subject to intentional disruption. Although we believe we have sufficient controls in place to prevent intentional disruptions, such as software viruses specifically designed to impede the performance of our products, we expect to be an ongoing target of such disruptions. Similarly, experienced computer programmers, or hackers, may attempt to penetrate our network security or the security of our web site and misappropriate proprietary information or cause interruptions of our services. Our activities could be substantially disrupted and our reputation, and future sales, harmed if these efforts are successful.
We face risks associated with our foreign operations. In recent periods over 40% of our net revenues, and a significant portion of our manufacturing costs and operating expenses, result from transactions outside of the United States, often in foreign currencies. Our international sales have been increasing as a percentage of our total sales. In fiscal year 2003, our operating results have been positively affected by changes in foreign currency rates. Our future operating results will continue to be subject to fluctuations in foreign currency rates, especially if international sales continue to grow as a percentage of our total sales, and we may be negatively impacted by fluctuations in foreign currency rates in the future. Our operating results could also be adversely affected by general uncertainty with each country’s political and economic structure. In addition, governmental regulation of imports or exports or our failure to obtain any required export approval of our technologies, particularly our encryption technologies, could impede our international sales. In light of recent terrorist activity, governments could enact additional regulation or restrictions on the use, import or export of encryption technologies. Additional regulation of encryption technology could delay or prevent the acceptance and use of encryption products and public networks for secure communications. This might decrease demand for our products and services.
We continue to make substantial changes to our information systems that could disrupt our business. During fiscal 2002, we began implementing Oracle 11i and a new customer relationship management system. We have completed the worldwide implementation of Oracle 11i in the September 2002 quarter. The first three phases of the CRM implementation occurred in June 2001, February 2002 and June 2002, with the remaining implementation phases scheduled for the third quarter of fiscal 2003 and first quarter of fiscal 2004. These types of transitions frequently prove disruptive to the underlying business of an enterprise and may cause us to incur higher costs than we anticipate. Failure to manage a smooth transition to the new systems and the ongoing operations and support of the new systems could materially harm our business operations.
Introduction of new operating systems may adversely affect our financial results and stock price. The inclusion of security, remote access or virus protection tools in new operating systems and hardware packages could adversely affect our sales. For example, the inclusion of features by Microsoft in future editions of Windows which directly compete with our products may decrease or delay the demand for certain of our products, including those currently under development. Additionally, as hardware vendors incorporate additional server-based network management and security tools into network operating systems, the demand may decrease for some of our products, including those currently under development.
Our earnings and stock price are subject to significant fluctuations. Due to many factors, including those noted in this section, our earnings and stock price have been and may continue to be subject to significant volatility. There
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
have been previous quarters in which we have experienced shortfalls in revenue and earnings from levels expected by securities analysts and investors, which have had an immediate and significant adverse effect on the trading price of our common stock. This may occur again in the future. Any such volatility may make it more difficult for us to raise capital in the future or pursue acquisitions that involve issuances of our common stock or securities convertible or exercisable into our common stock.
Fluctuations in our quarterly operating results have affected our stock price in the past and could affect our stock price in the future. If our quarterly operating results fail to meet the expectations of analysts and investors, the trading price of shares of our common stock and of the debentures could be negatively affected. Our quarterly operating results have varied substantially in the past and may vary substantially in the future depending upon a number of factors, including:
| • | the timing of announcements and releases of new or enhanced versions of our products and product upgrades; | ||
| • | the introduction of competitive products; | ||
| • | uncertainty about and customer confidence in the current economic conditions and outlook; | ||
| • | reduced demand for any given product; | ||
| • | seasonality in the end-of-period buying patterns of foreign and domestic software customers; and | ||
| • | the market’s transition between new releases of operating systems. |
In addition to the foregoing factors, the risk of quarterly fluctuations is increased by the fact that a significant portion of our net revenues has historically been generated during the last month of each fiscal quarter. Most resellers tend to make a majority of their purchases at the end of a fiscal quarter. In addition, many enterprise customers negotiate site licenses near the end of each quarter. In part, this is because these two groups are able, or believe that they are able, to negotiate lower prices and more favorable terms at that time. Our reliance on a large portion of revenue occurring at the end of the quarter and the increase in the dollar value of transactions that occur at the end of a quarter can result in increased uncertainty relating to quarterly revenues. Due to this end-of-period buying pattern, forecasts may not be achieved, either because expected sales do not occur or because they occur at lower prices or on terms that are less favorable to us. In addition, these factors increase the chances that our results could diverge from the expectations of investors and analysts.
We must effectively adapt to changes in the dynamic technological environment. We are increasingly focused on the Internet security market, which, in turn is dependent on further acceptance and increased use of the Internet. The following critical issues concerning the use of the Internet remain unresolved and may affect the market for our products and the use of the Internet as a medium to distribute or support our software products and the functionality of some of our products:
| • | security; | ||
| • | reliability; | ||
| • | cost; | ||
| • | ease of use; | ||
| • | accessibility; | ||
| • | quality of service; and | ||
| • | potential tax or other government regulations. |
In addition, new technologies, such as wireless devices, are gaining acceptance. We must adapt to these changing technological demands. If we are unable to timely assimilate changes brought about by the Internet and wireless based environments, our future net revenues and operating results could be adversely affected.
The results of our research and development efforts are uncertain. We will need to incur significant research and development expenditures in future periods as we strive to remain competitive. The length of our product development cycle has generally been greater than we originally expected and we are likely to experience delays in future product development. In addition, a portion of our development efforts has not been technologically successful and certain products have not achieved market acceptance. As a result, the products we are currently developing or may develop in the future may not be technologically successful, achieve market acceptance or compete effectively with products of our competitors.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
We are dependent upon certain distribution channels. A large portion of our sales is made through the retail distribution channel, which is subject to events that cause unpredictability in consumer demand. This increases the risk that we may not plan effectively for the future, which could result in adverse operating results in future periods. Our retail distribution customers also carry our competitors’ products. These retail distributors may have limited capital to invest in inventory. Their decisions to purchase our products are partly a function of pricing, terms and special promotions offered by our competitors and other factors that we do not control and cannot predict. Our agreements with retail distributors are generally nonexclusive and may be terminated by them or by us without cause. We would be adversely affected if companies in our chain of distributors chose to increase purchases from our competition relative to the amount they purchase from us.
Some distributors and resellers have experienced financial difficulties in the past. Distributors that account for a significant portion of our sales may experience financial difficulties in the future. If these distributors do experience financial difficulties and we are unable to move their inventories to other distributors, we may experience reduced sales or increased write-offs, which would adversely affect our operating results.
Product returns may negatively affect our net revenues. Product returns can occur when we introduce upgrades and new versions of products or when distributors or retailers have excess inventories, subject to various contractual limitations. Our return policy allows distributors, subject to these contractual limitations, to return purchased products in exchange for new products or for credit towards future purchases. End-users may return our products through dealers and distributors or to us directly for a full refund within a reasonably short period from the date of purchase. Future returns could exceed the reserves we have established for product returns, which could have a material adverse effect on our operating results.
We depend on internal communications systems that may be disrupted. Our order management and product shipping centers are geographically dispersed. A business disruption could occur as a result of natural disasters or the interruption in service by communications carriers. If our communications between these centers are disrupted, particularly at the end of a fiscal quarter, we may suffer an unexpected shortfall in net revenues and a resulting adverse impact on our operating results. Communications and Internet connectivity disruptions may also cause delays in customer access to our Internet-based services or product sales.
We are subject to litigation that could adversely affect our financial results. From time to time, we may be subject to claims that we have infringed the intellectual property rights of others, or other product liability claims, or other claims incidental to our business. We are currently involved in a number of lawsuits. We intend to defend all of these lawsuits vigorously. However, it is possible that we could suffer an unfavorable outcome in one or more of these cases. Depending on the amount and timing of any unfavorable resolutions of these lawsuits, our future results of operations or cash flows could be materially adversely affected in a particular period.
Although infringement claims may ultimately prove to be without merit, they are expensive to defend and may consume our resources or divert our attention from day-to-day operations. If a third party alleges that we have infringed their intellectual property rights, we may choose to litigate the claim and/or seek an appropriate license from the third party. If we engage in litigation and the third party is found to have a valid patent claim against us and a license is not available on reasonable terms, our business, operating results and financial condition may be materially adversely affected.
We must attract and retain personnel in a competitive marketplace. We believe that our future success will depend in part on our ability to recruit and retain highly skilled management, marketing and technical personnel. To accomplish this, we believe that we must provide personnel with a competitive compensation package, including stock options. Increases in shares available for issuance under our stock options plans require stockholder approval in many cases, and institutional stockholders, or stockholders generally, may not approve future increases. Additionally, there are several proposals in the Congress and in the accounting industry to require corporations to include a compensation expense in their statement of operations relating to the issuance of employee stock options. If such a measure is approved, we may decide to issue fewer stock options. As a result, we may be impaired in our efforts to attract and retain necessary personnel.
Our intellectual property and proprietary rights may not be adequately protected from all unauthorized uses. We regard our software and underlying technology as proprietary. We seek to protect our proprietary rights through
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
a combination of confidentiality agreements and copyright, patent, trademark and trade secret laws. Third parties may copy aspects of our products or otherwise obtain and use our proprietary information without authorization or develop similar technology independently. All of our products are protected by copyright laws, and we have a number of patents and patent applications pending. We may not achieve the desired protection from, and third parties may design around, our patents. In addition, existing copyright laws afford limited practical protection. Furthermore, the laws of some foreign countries do not offer the same level of protection of our proprietary rights as the laws of the United States, and we may be subject to unauthorized use of our products. Any legal action that we may bring to protect proprietary information could be expensive and may distract management from day-to-day operations.
Our products are complex and are operated in a wide variety of computer configurations, which could result in errors or product failures. Because we offer very complex products, undetected errors, failures or bugs may occur when they are first introduced or when new versions are released. Our products often are installed and used in large-scale computing environments with different operating systems, system management software and equipment and networking configurations, which may cause errors or failures in our products or may expose undetected errors, failures or bugs in our products. In the past, we have discovered software errors, failures and bugs in certain of our product offerings after their introduction and have experienced delays or lost revenues during the period required to correct these errors. Our customers’ computer environments are often characterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. Despite testing by us and by others, errors, failures or bugs may not be found in new products or releases after commencement of commercial shipments. Errors, failures or bugs in products released by us could result in negative publicity, product returns, loss of or delay in market acceptance of our products or claims by customers or others. In addition, if an actual or perceived breach of network security occurs in one of our end customer’s security systems, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques. Alleviating any of these problems could require significant expenditures of our capital and resources and could cause interruptions, delays or cessation of our product licensing, which could cause us to lose existing or potential customers and would adversely affect results of operations.
Most of our license agreements with customers contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that these provisions may not prove effective in limiting our liability.
Increased utilization and costs of our technical support services may adversely affect our financial results. Like many companies in the software industry, technical support costs comprise a significant portion of our operating costs and expenses. Over the short term, we may be unable to respond to fluctuations in customer demand for support services, including periods of high customer usage in which delays may be experienced. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. Further, customer demand for these services could cause increases in the costs of providing such services and adversely affect our operating results.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We believe there have been no significant changes in our market risk exposures during the six months ended September 30, 2002 as compared to what was previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2002.
Item 4. Controls and Procedures
| (a) | Evaluation of Disclosure Controls and Procedures. The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our chief executive officer and our chief financial officer, based on their evaluation of the effectiveness of our disclosure controls and procedures within 90 days before the filing date of this report, concluded that our disclosure controls and procedures were effective for this purpose. | |
| (b) | Changes in Internal Controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced above. |
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Part II. Other Information
Item 1. Legal Proceedings
Information with respect to this Item may be found in Note 10 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated into this Item 1 by reference.
Item 4. Submission of Matters to a Vote of Security Holders
| (a) | An annual meeting of stockholders of Symantec was held on September 12, 2002. | |
| (b) | Matters voted on at the meeting and votes cast on each were as follows: |
| Total Vote | Authority | |||||||
| Total Vote | Withheld | Withheld | ||||||
| For Each | From Each | From All | ||||||
| Director | Director | Nominees | ||||||
| 1. | To elect seven directors to Symantec’s Board of Directors, each to hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. | |||||||
| Tania Amochaev | 120,010,283 | 4,660,156 | — | |||||
| Dr. Per-Kristian Halvorsen | 120,022,174 | 4,648,265 | — | |||||
| Robert S. Miller | 119,361,884 | 5,308,555 | — | |||||
| Bill Owens | 119,356,055 | 5,314,384 | — | |||||
| George Reyes | 119,380,277 | 5,290,162 | — | |||||
| Daniel H. Schulman | 119,359,143 | 5,311,296 | — | |||||
| John W. Thompson | 123,278,941 | 1,391,498 | — |
| Non- | ||||||||||||||||||
| For | Against | Abstain | Votes | |||||||||||||||
| 2. | To consider and act upon a proposal to amend Symantec’s 1996 Equity Incentive Plan (the “1996 Plan”) to increase the number of shares of Symantec common stock authorized and reserved for issuance under the plan by 6,400,000 shares. | 75,507,253 | 47,882,497 | 172,982 | 1,107,707 | |||||||||||||
| Non- | ||||||||||||||||||
| For | Against | Abstain | Votes | |||||||||||||||
| 3. | To consider and act upon a proposal to amend the 1996 Plan to (i) modify the annual stock option grant to continuing non-employee directors from 10,000 shares to 12,000 shares, with a transition grant of 6,000 shares to be made following the annual meeting in September 2002, with the effect that continuing non-employee directors, who received stock option grants of 20,000 shares in fiscal year 2002, would receive option grants of 16,000 shares in fiscal year 2003 and 12,000 shares in fiscal years 2004 and beyond, and (ii) to change the time of the annual grant of these stock options from the first Board meeting following the first day of each | 80,021,732 | 43,204,346 | 336,654 | 1,107,707 | |||||||||||||
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Part II. Other Information
| Non- | ||||||||||||||||||
| For | Against | Abstain | Votes | |||||||||||||||
| fiscal year of Symantec to the day after the Annual Meeting of Stockholders. | ||||||||||||||||||
| Non- | ||||||||||||||||||
| For | Against | Abstain | Votes | |||||||||||||||
| 4. | To consider and act upon a proposal to adopt Symantec’s 2002 Executive Officers’ Stock Purchase Plan, including authorization to issue up to 250,000 shares of Symantec common stock. | 116,235,002 | 6,992,331 | 335,399 | 1,107,707 | |||||||||||||
| Non- | ||||||||||||||||
| For | Against | Abstain | Votes | |||||||||||||
| 5. | To consider and act upon a proposal to ratify the Board of Director’s selection of Ernst & Young LLP as Symantec’s independent auditors for the 2003 fiscal year. | 116,809,539 | 7,742,416 | 118,484 | — | |||||||||||
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Item 5. Other Information
Approval of Non-Audit Services
In September 2002, our audit committee approved the engagement of KPMG LLP for fiscal 2003 for statutory audits, consulting on accounting matters and tax consultation services.
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits. The following exhibits are filed as part of this Form 10-Q: 10.01 1996 Equity Incentive Plan, as amended October 15, 2002. 10.02 2002 Executive Officers’ Stock Purchase Plan. |
|
| (b) | Reports on Form 8-K A report on Form 8-K was filed by the Company on September 18, 2002, reporting that the Company dismissed Ernst & Young LLP as the Company’s independent public accountants and engaged KPMG LLP as its new independent public accountants to audit the Company’s financial statements for the fiscal year ending March 28, 2003. |
|
| A report on Form 8-K was filed by the Company on July 18, 2002, reporting that John W. Thompson, the Company’s Chairman and Chief Executive Officer, has adopted a 10b5-1 plan. This plan provides for quarterly sales of shares on the open market at prevailing market prices, subject to volume limits and minimum price requirements. The plan is effective immediately and will expire on December 31, 2004, unless terminated earlier. Mr. Thompson currently holds approximately 240,000 shares and stock options to purchase approximately 3.4 million additional shares of Symantec common stock. |
Items 2 and 3 are not applicable and have been omitted.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 11, 2002 | SYMANTEC CORPORATION (Registrant) |
| By | /s/ John W. Thompson | ||
| John W. Thompson, Chairman and Chief Executive Officer |
|||
| By | /s/ Gregory Myers | ||
| Gregory Myers, Chief Financial Officer and Senior Vice President of Finance |
|||
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CERTIFICATIONS
I, John W. Thompson, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Symantec Corporation; | |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| November 11, 2002 | /s/ John W. Thompson |
John W. Thompson Chairman and Chief Executive Officer |
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I, Gregory Myers, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Symantec Corporation; | |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| November 11, 2002 | /s/ Gregory Myers |
Gregory Myers Chief Financial Officer and Senior Vice President of Finance |
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EXHIBIT INDEX
| Exhibit | Description | |
| 10.01 | 1996 Equity Incentive Plan, as amended October 15, 2002. | |
| 10.02 | 2002 Executive Officers’ Stock Purchase Plan. |