e10vqza
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
|
|
|
(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 30, 2005. |
|
or |
|
o
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|
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 000-17781
Symantec Corporation
(Exact name of the registrant as specified in its charter)
|
|
|
Delaware |
|
77-0181864 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. employer
identification no.) |
|
20330 Stevens Creek Blvd.,
Cupertino, California
(Address of principal executive offices) |
|
95014-2132
(Zip Code) |
Registrants 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
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes
þ No
o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes
o No
þ
Shares of Symantec common stock, $0.01 par value per share,
outstanding as of October 28, 2005:
1,081,475,654 shares
SYMANTEC CORPORATION
FORM 10-Q/A
Amendment No. 1
Quarterly Period Ended September 30, 2005
EXPLANATORY NOTE
The purpose of this Amendment No. 1 to the Symantec
Corporation Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005 is to correct a misclassification
in our Condensed Consolidated Statement of Cash Flows for the
six months ended September 30, 2005 and to reclassify
certain revenue items in the Condensed Consolidated Statements
of Operations for the three and six months ended
September 30, 2005 and 2004.
In the Condensed Consolidated Statement of Cash Flows, we have
reclassified $145 million from Other accrued expenses
within Net cash provided by operating activities to Repurchases
of common stock within Net cash used in financing activities.
This reclassification does not have an impact on Ending cash and
cash equivalents, or on the Increase in cash and cash
equivalents, for the impacted period. In the Condensed
Consolidated Statements of Operations, we have reclassified
revenue between Content, subscriptions, and maintenance revenue
and Licenses revenue. This reclassification does not have an
impact on Total net revenues, Net income (loss) or Net
income (loss) per share for the impacted periods. The
nature and impact of these adjustments are described more fully
in Note 2 of the Notes to Condensed Consolidated Financial
Statements in this Form 10-Q/ A.
For ease of reference, this Form 10-Q/ A restates the
Form 10-Q for the fiscal quarter ended September 30,
2005 in its entirety. This Form 10-Q/ A does not reflect
events after the filing of the original Form 10-Q with the
Securities and Exchange Commission on November 9, 2005 and
does not modify or update disclosures as originally filed,
except in Part I Item 4, and as required
to reflect the effects of the reclassifications described above.
Specifically, the following items have been amended:
|
|
|
Part I Item 1 Financial
Statements |
|
|
Part I Item 2
Managements Discussion and Analysis of Financial Condition
and Results of Operations |
|
|
Part I Item 4 Controls and
Procedures |
|
|
Part II Item 6 Exhibits |
2
TABLE OF CONTENTS
3
PART I. FINANCIAL INFORMATION
|
|
Item 1. |
Condensed Consolidated Financial Statements |
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
March 31, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
(In thousands, except par | |
|
|
value) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,806,406 |
|
|
$ |
1,091,433 |
|
|
Short-term investments
|
|
|
2,626,926 |
|
|
|
2,115,154 |
|
|
Trade accounts receivable, net
|
|
|
444,120 |
|
|
|
285,325 |
|
|
Inventories
|
|
|
14,024 |
|
|
|
19,118 |
|
|
Current deferred income taxes
|
|
|
146,305 |
|
|
|
97,279 |
|
|
Other current assets
|
|
|
196,160 |
|
|
|
79,973 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,233,941 |
|
|
|
3,688,282 |
|
Property and equipment, net
|
|
|
863,216 |
|
|
|
382,689 |
|
Acquired product rights, net
|
|
|
1,294,374 |
|
|
|
127,619 |
|
Other intangible assets, net
|
|
|
1,496,517 |
|
|
|
30,739 |
|
Goodwill
|
|
|
9,933,776 |
|
|
|
1,365,213 |
|
Other long-term assets
|
|
|
45,588 |
|
|
|
19,679 |
|
|
|
|
|
|
|
|
|
|
$ |
18,867,412 |
|
|
$ |
5,614,221 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes
|
|
$ |
502,000 |
|
|
$ |
|
|
|
Accounts payable
|
|
|
162,688 |
|
|
|
74,685 |
|
|
Accrued compensation and benefits
|
|
|
248,331 |
|
|
|
140,543 |
|
|
Current deferred revenue
|
|
|
1,379,403 |
|
|
|
1,215,537 |
|
|
Other accrued expenses
|
|
|
321,161 |
|
|
|
91,033 |
|
|
Income taxes payable
|
|
|
283,031 |
|
|
|
179,225 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,896,614 |
|
|
|
1,701,023 |
|
Long-term deferred revenue
|
|
|
132,606 |
|
|
|
114,724 |
|
Long-term deferred tax liabilities
|
|
|
708,910 |
|
|
|
88,613 |
|
Other long-term obligations
|
|
|
40,867 |
|
|
|
4,408 |
|
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: 3,000,000; issued
and outstanding: 1,117,074 and 710,522 shares, respectively)
|
|
|
11,171 |
|
|
|
7,105 |
|
|
Capital in excess of par value
|
|
|
13,967,035 |
|
|
|
2,412,947 |
|
|
Accumulated other comprehensive income
|
|
|
160,364 |
|
|
|
191,938 |
|
|
Deferred stock-based compensation
|
|
|
(62,312 |
) |
|
|
(21,070 |
) |
|
Retained earnings
|
|
|
1,012,157 |
|
|
|
1,114,533 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
15,088,415 |
|
|
|
3,705,453 |
|
|
|
|
|
|
|
|
|
|
$ |
18,867,412 |
|
|
$ |
5,614,221 |
|
|
|
|
|
|
|
|
The accompanying Notes to Condensed Consolidated Financial
Statements
are an integral part of these financial statements.
4
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In thousands, except per share data) | |
|
|
(As restated) | |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Content, subscriptions, and maintenance
|
|
$ |
717,155 |
|
|
$ |
466,339 |
|
|
$ |
1,286,009 |
|
|
$ |
877,196 |
|
|
|
Licenses
|
|
|
338,709 |
|
|
|
151,974 |
|
|
|
469,797 |
|
|
|
297,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
1,055,864 |
|
|
|
618,313 |
|
|
|
1,755,806 |
|
|
|
1,174,947 |
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Content, subscriptions, and maintenance
|
|
|
173,347 |
|
|
|
83,492 |
|
|
|
272,027 |
|
|
|
159,781 |
|
|
|
Licenses
|
|
|
10,623 |
|
|
|
12,523 |
|
|
|
17,725 |
|
|
|
25,245 |
|
|
|
Amortization of acquired product rights
|
|
|
129,472 |
|
|
|
13,204 |
|
|
|
140,485 |
|
|
|
24,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
313,442 |
|
|
|
109,219 |
|
|
|
430,237 |
|
|
|
209,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
742,422 |
|
|
|
509,094 |
|
|
|
1,325,569 |
|
|
|
965,467 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
401,674 |
|
|
|
201,886 |
|
|
|
612,783 |
|
|
|
389,818 |
|
|
|
Research and development
|
|
|
187,313 |
|
|
|
83,816 |
|
|
|
278,546 |
|
|
|
156,700 |
|
|
|
General and administrative
|
|
|
59,379 |
|
|
|
27,578 |
|
|
|
89,767 |
|
|
|
51,863 |
|
|
|
Amortization of other intangible assets from acquisitions
|
|
|
48,309 |
|
|
|
1,142 |
|
|
|
50,048 |
|
|
|
2,034 |
|
|
|
Amortization of deferred stock-based compensation(1)
|
|
|
13,389 |
|
|
|
639 |
|
|
|
16,174 |
|
|
|
639 |
|
|
|
Acquired in-process research and development
|
|
|
284,000 |
|
|
|
|
|
|
|
284,000 |
|
|
|
2,262 |
|
|
|
Restructuring
|
|
|
1,452 |
|
|
|
1,916 |
|
|
|
4,926 |
|
|
|
2,776 |
|
|
|
Integration planning
|
|
|
5,253 |
|
|
|
|
|
|
|
13,154 |
|
|
|
|
|
|
|
Patent settlement
|
|
|
|
|
|
|
|
|
|
|
2,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,000,769 |
|
|
|
316,977 |
|
|
|
1,351,598 |
|
|
|
606,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(258,347 |
) |
|
|
192,117 |
|
|
|
(26,029 |
) |
|
|
359,375 |
|
|
|
Interest and other income, net
|
|
|
39,963 |
|
|
|
10,723 |
|
|
|
62,721 |
|
|
|
21,161 |
|
|
|
Interest expense
|
|
|
(7,503 |
) |
|
|
(5,291 |
) |
|
|
(7,503 |
) |
|
|
(10,582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(225,887 |
) |
|
|
197,549 |
|
|
|
29,189 |
|
|
|
369,954 |
|
|
|
Provision for income taxes
|
|
|
25,441 |
|
|
|
61,926 |
|
|
|
81,884 |
|
|
|
117,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(251,328 |
) |
|
$ |
135,623 |
|
|
$ |
(52,695 |
) |
|
$ |
252,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic
|
|
$ |
(0.21 |
) |
|
$ |
0.22 |
|
|
$ |
(0.06 |
) |
|
$ |
0.40 |
|
Net income (loss) per share diluted
|
|
$ |
(0.21 |
) |
|
$ |
0.19 |
|
|
$ |
(0.06 |
) |
|
$ |
0.35 |
|
Shares used to compute net income (loss) per share
basic
|
|
|
1,172,130 |
|
|
|
629,730 |
|
|
|
941,727 |
|
|
|
627,124 |
|
Shares used to compute net income (loss) per share
diluted
|
|
|
1,172,130 |
|
|
|
736,538 |
|
|
|
941,727 |
|
|
|
735,644 |
|
|
|
(1) |
Amortization of deferred stock-based compensation is allocated
as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$ |
4,457 |
|
|
$ |
246 |
|
|
$ |
5,263 |
|
|
$ |
246 |
|
Research and development
|
|
|
6,763 |
|
|
|
337 |
|
|
|
7,868 |
|
|
|
337 |
|
General and administrative
|
|
|
2,169 |
|
|
|
56 |
|
|
|
3,043 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,389 |
|
|
$ |
639 |
|
|
$ |
16,174 |
|
|
$ |
639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Condensed Consolidated Financial
Statements
are an integral part of these financial statements.
5
SYMANTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In thousands) | |
|
|
(As restated) | |
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(52,695 |
) |
|
$ |
252,900 |
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
80,830 |
|
|
|
43,438 |
|
|
Accretion of fair market value adjustment related to convertible
subordinated notes
|
|
|
5,400 |
|
|
|
1,582 |
|
|
Amortization of investments, net
|
|
|
(20,485 |
) |
|
|
(14,053 |
) |
|
Amortization and write-off of acquired product rights
|
|
|
140,485 |
|
|
|
27,229 |
|
|
Amortization of other intangible assets from acquisitions
|
|
|
50,048 |
|
|
|
2,034 |
|
|
Impairment of equity investments
|
|
|
236 |
|
|
|
284 |
|
|
Write-off of property and equipment
|
|
|
1,332 |
|
|
|
2,477 |
|
|
Amortization of deferred stock-based compensation
|
|
|
16,174 |
|
|
|
639 |
|
|
Write-off of acquired in-process research and development
|
|
|
284,000 |
|
|
|
2,262 |
|
|
Deferred income taxes
|
|
|
(103,384 |
) |
|
|
(612 |
) |
|
Income tax benefit from stock options
|
|
|
61,621 |
|
|
|
59,996 |
|
|
Net changes in assets and liabilities, excluding effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
|
109,547 |
|
|
|
(56,866 |
) |
|
|
Inventories
|
|
|
4,632 |
|
|
|
(5,347 |
) |
|
|
Other current assets
|
|
|
(55,874 |
) |
|
|
(19,689 |
) |
|
|
Other long-term assets
|
|
|
4,600 |
|
|
|
1,669 |
|
|
|
Accounts payable
|
|
|
49,806 |
|
|
|
17,034 |
|
|
|
Accrued compensation and benefits
|
|
|
(44,296 |
) |
|
|
(14,859 |
) |
|
|
Deferred revenue
|
|
|
47,702 |
|
|
|
156,827 |
|
|
|
Other accrued expenses
|
|
|
(17,766 |
) |
|
|
319 |
|
|
|
Income taxes payable
|
|
|
(17,884 |
) |
|
|
12,591 |
|
|
|
Other long-term obligations
|
|
|
(14,760 |
) |
|
|
(558 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
529,269 |
|
|
|
469,297 |
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(81,733 |
) |
|
|
(39,040 |
) |
|
Cash acquired in (payments for) business acquisitions, net
|
|
|
1,122,854 |
|
|
|
(328,602 |
) |
|
Purchase of equity investments
|
|
|
(6,483 |
) |
|
|
(1,100 |
) |
|
Purchases of marketable securities
|
|
|
(1,651,282 |
) |
|
|
(1,046,685 |
) |
|
Proceeds from sales of marketable securities
|
|
|
2,918,020 |
|
|
|
719,349 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
2,301,376 |
|
|
|
(696,078 |
) |
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(1,680,205 |
) |
|
|
(119,953 |
) |
|
Net proceeds from sales of common stock under employee stock
benefit plans
|
|
|
80,655 |
|
|
|
91,270 |
|
|
Repayment of line of credit
|
|
|
(491,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,091,012 |
) |
|
|
(28,683 |
) |
Effect of exchange rate fluctuations on cash and cash equivalents
|
|
|
(24,660 |
) |
|
|
4,876 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
714,973 |
|
|
|
(250,588 |
) |
Beginning cash and cash equivalents
|
|
|
1,091,433 |
|
|
|
839,162 |
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$ |
1,806,406 |
|
|
$ |
588,574 |
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash transactions:
|
|
|
|
|
|
|
|
|
|
Issuance of common stock and stock options for business
acquisitions
|
|
$ |
13,196,850 |
|
|
$ |
22,578 |
|
|
|
|
|
|
|
|
|
Payable for repurchases of common stock
|
|
$ |
144,838 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Condensed Consolidated Financial
Statements
are an integral part of these financial statements.
6
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(As restated)
|
|
Note 1. |
Basis of Presentation |
The condensed consolidated financial statements of Symantec
Corporation, or Symantec, as of September 30, 2005 and for
the three and six-month periods ended September 30, 2005
and 2004 are unaudited and, in the opinion of management,
contain all adjustments, consisting only of normal recurring
items, except as otherwise indicated, necessary for the fair
presentation of the financial position and results of operations
for the interim periods. All significant intercompany accounts
and transactions have been eliminated. Certain previously
reported amounts have been reclassified to conform to the
current presentation.
On July 2, 2005, we completed our acquisition of VERITAS
Software Corporation, or VERITAS, a leading provider of software
and services to enable utility computing. As a result of the
acquisition, we issued approximately 483 million shares of
Symantec common stock based on an exchange ratio of
1.1242 shares of Symantec common stock for each outstanding
share of VERITAS common stock as of July 2, 2005. In
addition, we assumed each outstanding option to purchase VERITAS
common stock with an exercise price equal to or less than $49.00
as well as each additional option required to be assumed by
applicable law, and we also assumed each restricted stock unit,
or RSU, to purchase VERITAS common stock based on the same
exchange ratio. The results of operations of VERITAS have been
included in our results of operations beginning on July 2,
2005. See Note 5 of the Condensed Consolidated Financial
Statements for pro forma results of operations of Symantec and
VERITAS.
The results of operations for the three and six-month periods
ended September 30, 2005 are not necessarily indicative of
the results to be expected for the entire year. These condensed
consolidated financial statements should be read in conjunction
with (1) the audited Consolidated Financial Statements and
Notes thereto included in the Symantec Annual Report on
Form 10-K for the
year ended March 31, 2005, (2) the audited
Consolidated Financial Statements of VERITAS, including the
consolidated balance sheets at December 31, 2004 and 2003,
and the consolidated statements of operations, cash flows and
stockholders equity for each of the three years in the
period ended December 31, 2004, included in Amendment
No. 1 to Symantecs Registration Statement on
Form S-4, filed on
May 18, 2005, and (3) the unaudited Condensed
Consolidated Financial Statements of VERITAS, including the
condensed consolidated balance sheet at March 31, 2005, and
the condensed consolidated statements of operations and cash
flows for the three-month periods ended March 31, 2005 and
2004, included in Amendment No. 1 to Symantecs
Registration Statement on
Form S-4, filed on
May 18, 2005.
We have a 52/53-week
accounting fiscal year. Accordingly, all references as of and
for the periods ended September 30, 2005, March 31,
2005, and September 30, 2004 reflect amounts as of and for
the periods ended September 30, 2005, April 1, 2005,
and October 1, 2004, respectively. The three-month periods
ended September 30, 2005 and 2004 each comprised
13 weeks of activity. The six-month periods ended
September 30, 2005 and 2004 each comprised 26 weeks of
activity.
All Symantec share and per share amounts in this
Form 10-Q/A
retroactively reflect the two-for-one stock split, effected as a
stock dividend, which occurred on November 30, 2004.
Use of Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the condensed consolidated
financial statements and accompanying notes. Actual results
could differ from those estimates.
7
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant Accounting Policies
Foreign Currency Translation
The functional currency of our foreign subsidiaries is generally
the local currency. Assets and liabilities denominated in
foreign currencies are translated using the exchange rate on the
balance sheet dates. The translation adjustments resulting from
this process are included as a component of Stockholders
equity in Accumulated other comprehensive income. Revenues and
expenses are translated using monthly average exchange rates
during the year. Foreign currency transaction gains and losses
are included in the determination of net income. Deferred tax
assets (liabilities) are established on the cumulative
translation adjustment attributable to unremitted foreign
earnings that are not intended to be indefinitely reinvested.
Revenue Recognition
We market and distribute our software products both as
standalone software products and as integrated product suites.
We recognize revenue when the following conditions have been met:
|
|
|
|
|
Persuasive evidence of an arrangement exists |
|
|
|
Delivery has occurred or services have been rendered |
|
|
|
Collection of a fixed and determinable amount is considered
probable |
|
|
|
If appropriate, reasonable estimates of future product returns
can be made |
We derive revenue primarily from sales of content, subscriptions
and maintenance and licenses.
Content, subscriptions and maintenance revenue includes
arrangements for software maintenance and technical support for
our products, content and subscription services primarily
related to our security products, revenue from arrangements
where vendor-specific objective evidence, or VSOE, of the fair
value of undelivered elements does not exist, and managed
security services. These arrangements are generally offered to
our customers over a specified period of time and we recognize
the related revenue ratably over the maintenance, subscription,
or service period.
Content, subscriptions and maintenance revenue also includes
professional services revenue, which consists primarily of the
fees we earn related to consulting, education, and training
services. We generally recognize revenue from professional
services as the services are performed or upon written
acceptance from customers, if applicable, assuming all other
conditions for revenue recognition noted above have been met.
License revenue is derived primarily from the licensing of our
various products and technology. We generally recognize license
revenue upon delivery of the product, assuming all other
conditions for revenue recognition noted above have been met.
We enter into perpetual software license agreements through
direct sales to customers and indirect sales with distributors
and resellers. The license agreements generally include product
maintenance agreements, for which the related revenue is
included with content, subscriptions and maintenance and is
deferred and recognized ratably over the period of the
agreements.
In arrangements that include multiple elements, including
perpetual software licenses and maintenance and/or services and
packaged products with content updates, we allocate and defer
revenue for the undelivered items based on VSOE of fair value of
the undelivered elements, and recognize the difference between
the total arrangement fee and the amount deferred for the
undelivered items as license revenue. Our deferred revenue
consists primarily of the unamortized balance of enterprise
product maintenance and consumer product content update
subscriptions.
8
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
VSOE of each element is based on the price for which the
undelivered element is sold separately. We determine fair value
of the undelivered elements based on historical evidence of our
stand-alone sales of these elements to third parties. When VSOE
does not exist for undelivered items such as maintenance, the
entire arrangement fee is recognized ratably over the
performance period.
For our Consumer Products segment, we sell packaged software
products through a multi-tiered distribution channel. We also
sell electronic download and packaged products via the Internet.
We separately sell annual content update subscriptions directly
to end-users primarily via the Internet. We do not recognize
package product revenue on distribution and reseller channel
inventory in excess of specified inventory levels in these
channels. We defer the portion of revenue from package and
electronic download products related to content updates
subscriptions and recognize this revenue ratably over the term
of the subscription. We offer the right of return of our
products under various policies and programs with our
distributors, resellers, and end-user customers. We estimate and
record reserves for end-user product returns as an offset to
revenue.
For our Enterprise Security, Data Protection, and Storage and
Server Management segments, we generally recognize revenue from
licensing of software products through our indirect sales
channel upon sell-through or with evidence of an end user. For
licensing of our software to original equipment manufacturers,
or OEMs, royalty revenue is recognized when the OEM reports the
sale of the software products to an end-user customer, generally
on a quarterly basis. In addition to license royalties, some
OEMs pay an annual flat fee and/or support royalties for the
right to sell maintenance and technical support to the end user.
We recognize revenue from OEM support royalties and fees ratably
over the term of the support agreement.
We offer channel and end-user rebates for products within our
Enterprise Security, Storage and Server Management, and Consumer
Products segments. Our estimated reserves for channel volume
incentive rebates are based on distributors and
resellers actual performance against the terms and
conditions of volume incentive rebate programs, which are
typically entered into quarterly. Our reserves for end-user
rebates are estimated based on the terms and conditions of the
promotional program, actual sales during the promotion, amount
of actual redemptions received, historical redemption trends by
product and by type of promotional program, and the value of the
rebate. We estimate and record reserves for channel and end-user
rebates, and we account for these reserves as an offset to
revenue.
Cash Equivalents and Short-Term Investments
We classify all of our short-term investments in accordance with
Statement of Financial Accounting Standards, or SFAS,
No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Our short-term investments do not include
strategic investments. We classify our short-term investments as
available-for-sale, and all short-term investments consist of
securities with original maturities in excess of 90 days.
We consider investments in instruments purchased with an
original maturity of 90 days or less to be cash
equivalents. Our short-term investments are reported at fair
value with unrealized gains and losses, net of tax, included in
Accumulated other comprehensive income within Stockholders
equity on the Condensed Consolidated Balance Sheets. The
amortization of premiums and discounts on the investments and
realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are
included in Interest and other income, net, in the Condensed
Consolidated Statements of Operations. The cost of securities
sold is based upon the specific identification method.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount
and are not interest bearing. We maintain an allowance for
doubtful accounts to reserve for potentially uncollectible trade
receivables. We also review our trade receivables by aging
category to identify specific customers with known disputes or
collectibility
9
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
issues. We exercise judgment when determining the adequacy of
these reserves as we evaluate historical bad debt trends,
general economic conditions in the United States and
internationally, and changes in customer financial conditions.
Equity Investments
We have equity investments in privately held companies for
business and strategic purposes. These investments are included
in Other long-term assets on the Condensed Consolidated Balance
Sheets and are accounted for under the cost method as we do not
have significant influence over these investees. Under the cost
method, the investment is recorded at its initial cost and is
periodically reviewed for impairment. Each quarter we assess our
compliance with accounting guidance, including the provisions of
Financial Accounting Standards Board Interpretation No., or FIN,
46R, Consolidation of Variable Interest Entities-An
Interpretation of ARB No. 51, and any impairment
issues. Under FIN 46R, we must consolidate a variable
interest entity if we have a variable interest (or combination
of variable interests) in the entity that will absorb a majority
of the entitys expected losses, receive a majority of the
entitys expected residual returns, or both. Currently, our
equity investments are not subject to consolidation under
FIN 46R as we do not have significant influence over these
investees and we do not receive a majority of the returns.
During our review for impairment, we examine the investees
actual and forecasted operating results, financial position, and
liquidity, as well as business/industry factors in assessing
whether a decline in value of an equity investment has occurred
that is other-than-temporary. When such a decline in value is
identified, the fair value of the equity investment is estimated
based on the preceding factors and an impairment loss is
recognized in Interest and other income, net, in the Condensed
Consolidated Statements of Operations. During the three and
six-month periods ended September 30, 2005 and 2004, we
recognized an insignificant amount of impairment losses on our
equity investments.
Derivative Financial Instruments
We utilize some natural hedging to mitigate our foreign currency
exposures and we manage certain residual exposures through the
use of one-month forward foreign exchange contracts. We enter
into forward foreign exchange contracts with high-quality
financial institutions primarily to minimize currency exchange
risks associated with certain balance sheet positions
denominated in foreign currencies. We do not utilize derivative
instruments for trading or speculative purposes. Gains and
losses on the contracts are included in Interest and other
income, net, in the Condensed Consolidated Statements of
Operations in the period that gains and losses on the underlying
transactions are recognized. The gains and losses on the
contracts generally offset the gains and losses on the
underlying transactions. The fair value of forward foreign
exchange contracts are adjusted through earnings. As of
September 30, 2005, the notional amount of our forward
exchange contracts was $544 million, all of which matures
in 35 days or less. We do not hedge our foreign currency
translation risk.
Inventories
Inventories are valued at the lower of cost or market. Cost is
principally determined using currently adjusted standards, which
approximate actual cost on a
first-in, first-out
basis. Inventory consists of raw materials and finished goods.
10
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property, Equipment, and Leasehold Improvements
Property, equipment, and leasehold improvements are stated at
cost, net of accumulated depreciation and amortization.
Depreciation and amortization is provided on a straight-line
basis over the estimated useful lives of the respective assets
as follows:
|
|
|
|
|
Computer hardware and software two to five years |
|
|
|
Office furniture and equipment three to five years |
|
|
|
Leasehold improvements the shorter of the lease term
or seven years |
|
|
|
Buildings twenty-five to thirty years |
Acquired Product Rights
Acquired product rights are comprised of purchased product
rights, technologies, databases and revenue-related order
backlog, and contracts from acquired companies. Acquired product
rights are stated at cost less accumulated amortization.
Amortization of acquired product rights is provided on a
straight-line basis over the estimated useful lives of the
respective assets, generally one to five years, and is included
in Cost of revenues in the Condensed Consolidated Statements of
Operations.
Goodwill and Other Intangible Assets
We account for goodwill and other intangible assets in
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 requires that
goodwill and identifiable intangible assets with indefinite
useful lives be tested for impairment at least annually.
SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives and reviewed for impairment in accordance
with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. We test goodwill annually for
impairment or more frequently if events and circumstances
warrant.
Long-Lived Assets
We account for long-lived assets in accordance with
SFAS No. 144, which requires that long-lived and
intangible assets, including Property, equipment, leasehold
improvements, and Acquired product rights, be evaluated for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. We
would recognize an impairment loss when the sum of the
undiscounted future net cash flows expected to result from the
use of the asset and its eventual disposition is less than its
carrying amount. Such impairment loss would be measured as the
difference between the carrying amount of the asset and its fair
value. Assets to be disposed of would be separately presented in
the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and no longer
depreciated. The assets and liabilities of a disposal group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
Income Taxes
The provision for income taxes is computed using the asset and
liability method. Under this method, we recognize deferred tax
assets and liabilities for the expected future tax consequences
of temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and
liabilities, net operating loss carryforwards, and tax credit
carryforwards. Deferred tax assets are reduced by a valuation
allowance when it is more likely than not that some portion or
all of the deferred tax assets will not be realized. We also
account for any income tax contingencies in accordance with
SFAS No. 5, Accounting for Contingencies.
11
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net Income Per Share
Basic net income per share is computed using the weighted
average number of common shares outstanding during the periods.
Diluted net income per share is computed using the weighted
average number of common shares outstanding and potentially
dilutive common shares outstanding during the periods.
Potentially dilutive common shares include the assumed exercise
of stock options using the treasury stock method and conversion
of debt, if dilutive in the period. Potentially dilutive common
shares are excluded in net loss periods, as their effect would
be antidilutive.
Stock-Based Compensation
We account for stock-based compensation awards to employees
using the intrinsic value method in accordance with Accounting
Principles Board Opinion, or APB, No. 25, Accounting for
Stock Issued to Employees, and to non-employees using the
fair value method in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation. In addition, we
apply applicable provisions of FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB No. 25. As
discussed in Note 5 of the Condensed Consolidated Financial
Statements, in connection with the acquisition of VERITAS, we
assumed outstanding options to purchase shares of VERITAS common
stock and converted them into options to purchase
66 million shares of Symantec common stock.
Pro forma information regarding net income and net income per
share is required by SFAS No. 123. This information is
required to be determined as if we had accounted for our
employee stock options, including shares issued under the
Employee Stock Purchase Plan, or ESPP, granted subsequent to
March 31, 1995, under the fair value method of that
statement. The following table illustrates the effect on net
income (loss) and net income (loss) per share as if we had
applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation
using the Black-Scholes option-pricing model for the three and
six-month periods ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Net income (loss), as reported
|
|
$ |
(251,328 |
) |
|
$ |
135,623 |
|
|
$ |
(52,695 |
) |
|
$ |
252,900 |
|
|
Add: Amortization of deferred stock-based compensation included
in reported net income (loss), net of tax
|
|
|
9,716 |
|
|
|
435 |
|
|
|
11,945 |
|
|
|
435 |
|
|
Less: Stock-based employee compensation expense excluded from
reported net income (loss), net of tax
|
|
|
(49,242 |
) |
|
|
(29,194 |
) |
|
|
(98,593 |
)(1) |
|
|
(56,441 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
(290,854 |
) |
|
$ |
106,864 |
|
|
$ |
(139,343 |
) |
|
$ |
196,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(0.21 |
) |
|
$ |
0.22 |
|
|
$ |
(0.06 |
) |
|
$ |
0.40 |
|
|
Pro forma
|
|
$ |
(0.25 |
) |
|
$ |
0.18 |
|
|
$ |
(0.15 |
) |
|
$ |
0.33 |
|
Diluted net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(0.21 |
) |
|
$ |
0.19 |
|
|
$ |
(0.06 |
) |
|
$ |
0.35 |
|
|
Pro forma
|
|
$ |
(0.25 |
) |
|
$ |
0.15 |
|
|
$ |
(0.15 |
) |
|
$ |
0.28 |
|
|
|
(1) |
Includes a charge of $18 million resulting from the
inclusion of unamortized expense for ESPP offering periods that
were cancelled as a result of a plan amendment to eliminate the
two-year offering period effective July 1, 2005. |
12
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Concentrations of Credit Risk
A significant portion of our revenues and net income is derived
from international sales and independent agents and
distributors. Fluctuations of the United States dollar against
foreign currencies, changes in local regulatory or economic
conditions, piracy, or nonperformance by independent agents or
distributors could adversely affect operating results.
Financial instruments that potentially subject us to
concentrations of credit risk consist principally of cash
equivalents, short-term investments, and trade accounts
receivable. Our investment portfolio is diversified and consists
of investment grade securities. Our investment policy limits the
amount of credit risk exposure to any one issuer and in any one
country. We are exposed to credit risks in the event of default
by the issuers to the extent of the amount recorded on the
Consolidated Balance Sheets. The credit risk in our trade
accounts receivable is substantially mitigated by our credit
evaluation process, reasonably short collection terms, and the
geographical dispersion of sales transactions. We maintain
reserves for potential credit losses and such losses have been
within managements expectations.
Legal Expenses
We accrue estimated legal expenses when the likelihood of the
incurrence of the related costs is probable and management has
the ability to estimate such costs. If both of these conditions
are not met, management records the related legal expenses when
incurred. Amounts that we accrue are not discounted. The
material assumptions used to estimate the amount of legal
expenses include:
|
|
|
|
|
The monthly legal expense incurred by our external attorneys on
the particular case being evaluated |
|
|
|
Communication between us and our external attorneys on the
expected duration of the lawsuit and the estimated expenses
during that time |
|
|
|
Our strategy regarding the lawsuit |
|
|
|
Deductible amounts under our insurance policies |
|
|
|
Past experiences with similar lawsuits |
Accumulated Other Comprehensive Income
We report comprehensive income or loss in accordance with the
provisions of SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting
comprehensive income and its components in the financial
statements. The components of other comprehensive income (loss)
consist of unrealized gains and losses on marketable securities,
net of tax, and foreign currency translation adjustments, net of
tax. Unrealized gains and losses on short-term investments, net
of taxes, are insignificant for all periods presented.
Recent Accounting Pronouncements
In June 2005, the Financial Accounting Standards Board, or FASB,
issued FASB Staff Position, or FSP,
FAS 143-1,
Accounting for Electronic Equipment Waste Obligations,
which provides guidance on the accounting for certain
obligations associated with the Directive on Waste Electrical
and Electronic Equipment, or the Directive, which was adopted by
the European Union, or the EU. Under the Directive, the waste
management obligation for historical equipment, defined as
products put on the market on or prior to August 13, 2005,
remains with the commercial user until the equipment is
replaced. FSP
FAS 143-1 is
required to be applied to the later of the first fiscal period
ending after June 8, 2005 or the date of the
Directives adoption into law by the applicable EU member
countries in which we have significant operations. We are
currently evaluating the impact of FSP
FAS 143-1 on our
financial position and results of operations. The effects will
depend on the respective laws adopted by the EU member
countries.
13
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which replaces
APB No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements An Amendment of APB Opinion
No. 28. SFAS No. 154 provides guidance on
accounting for and reporting changes in accounting principle and
error corrections. SFAS No. 154 requires that changes
in accounting principle be applied retrospectively to prior
period financial statements and is effective for fiscal years
beginning after December 15, 2005. We do not expect the
adoption of SFAS No. 154 to have a material impact on
our consolidated financial position, results of operations, or
cash flows.
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, which requires companies to measure
and recognize compensation expense for all stock-based payments
at fair value. SFAS No. 123R is effective for annual
periods beginning after June 15, 2005 and, thus, will be
effective for us beginning with the first quarter of fiscal
2007. We are currently evaluating the impact of
SFAS No. 123R on our financial position and results of
operations. See Stock-Based Compensation above for information
related to the pro forma effects on our reported net income and
net income per share when applying the fair value recognition
provisions of the previous SFAS No. 123 to stock-based
employee compensation.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets An Amendment of
APB Opinion No. 29, Accounting for Nonmonetary
Transactions. SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for
exchanges that do not have commercial substance.
SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
SFAS No. 153 is effective for fiscal periods beginning
after June 15, 2005. The adoption of SFAS No. 153
did not have a material impact on our consolidated financial
position, results of operations, or cash flows.
In December 2004, the FASB issued FSP
FAS 109-1,
Application of FASB Statement No. 109, Accounting
for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act
of 2004. The American Jobs Creation Act introduces a special
tax deduction on qualified production activities. FSP
FAS 109-1
clarifies that this tax deduction should be accounted for as a
special deduction in accordance with SFAS No. 109. We
do not expect FSP
FAS 109-1 to have
a material impact on our consolidated financial position,
results of operations, or cash flows.
|
|
Note 2. |
Restatement of Condensed Consolidated Financial Statements |
Subsequent to the filing of our
Form 10-Q for the
quarter ended September 30, 2005, we identified a
classification error in our Condensed Consolidated Statement of
Cash Flows for the six months ended September 30, 2005 and
determined to reclassify certain items within Net revenues in
our Condensed Consolidated Statements of Operations for the
three and six months ended September 30, 2005 and 2004. As
a result, we have restated the accompanying Condensed
Consolidated Financial Statements for the three and six months
ended September 30, 2005 and 2004 to reflect the correction
of this error and the reclassifications. The restatement has no
impact on our previously reported Net income (loss), Net income
(loss) per share, Cash and cash equivalents, or the Condensed
Consolidated Balance Sheets.
|
|
|
Condensed Consolidated Statements of Operations |
We have reclassified certain components of Net revenues
previously reported as Licenses to Content, subscriptions, and
maintenance within Net revenues in our Condensed Consolidated
Statements of Operations for the three and six months ended
September 30, 2005. As a result, Licenses has decreased and
Content, subscriptions, and maintenance has increased for the
three and six months ended September 30, 2005 and 2004.
14
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables present the impact of the reclassification
adjustments on our previously reported Condensed Consolidated
Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
September 30, 2005 | |
|
September 30, 2004 | |
|
|
| |
|
| |
|
|
As Previously | |
|
|
|
As Previously | |
|
|
|
|
Reported | |
|
Adjustments | |
|
As Restated | |
|
Reported | |
|
Adjustments | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Content, subscriptions, and maintenance
|
|
$ |
709,006 |
|
|
$ |
8,149 |
|
|
$ |
717,155 |
|
|
$ |
445,531 |
|
|
$ |
20,808 |
|
|
$ |
466,339 |
|
|
Licenses
|
|
|
346,858 |
|
|
|
(8,149 |
) |
|
|
338,709 |
|
|
|
172,782 |
|
|
|
(20,808 |
) |
|
|
151,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
1,055,864 |
|
|
$ |
|
|
|
$ |
1,055,864 |
|
|
$ |
618,313 |
|
|
$ |
|
|
|
$ |
618,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
| |
|
|
September 30, 2005 | |
|
September 30, 2004 | |
|
|
| |
|
| |
|
|
As Previously | |
|
|
|
As Previously | |
|
|
|
|
Reported | |
|
Adjustments | |
|
As Restated | |
|
Reported | |
|
Adjustments | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Content, subscriptions, and maintenance
|
|
$ |
1,267,059 |
|
|
$ |
18,950 |
|
|
$ |
1,286,009 |
|
|
$ |
813,329 |
|
|
$ |
63,867 |
|
|
$ |
877,196 |
|
|
Licenses
|
|
|
488,747 |
|
|
|
(18,950 |
) |
|
|
469,797 |
|
|
|
361,618 |
|
|
|
(63,867 |
) |
|
|
297,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
1,755,806 |
|
|
$ |
|
|
|
$ |
1,755,806 |
|
|
$ |
1,174,947 |
|
|
$ |
|
|
|
$ |
1,174,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Cash Flows |
For the six months ended September 30, 2005, the change in
Other accrued expenses within Net cash provided by operating
activities included amounts payable for repurchases of common
stock of $145 million. This amount should have been
reflected as a reduction to Repurchases of common stock within
Net cash used in financing activities. In addition, we
determined that a clerical error had occurred in reporting the
Issuance of common stock and stock options for business
combination included in the Supplemental schedule of non-cash
transactions.
15
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the impact of the adjustments on
our previously reported Condensed Consolidated Statements of
Cash Flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30, 2005 | |
|
|
| |
|
|
As Previously | |
|
|
|
|
Reported | |
|
Adjustments | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(52,695 |
) |
|
$ |
|
|
|
$ |
(52,695 |
) |
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
80,830 |
|
|
|
|
|
|
|
80,830 |
|
|
Accretion of fair market value adjustment related to convertible
subordinated notes
|
|
|
5,400 |
|
|
|
|
|
|
|
5,400 |
|
|
Amortization of investments, net
|
|
|
(20,485 |
) |
|
|
|
|
|
|
(20,485 |
) |
|
Amortization and write-off of acquired product rights
|
|
|
140,485 |
|
|
|
|
|
|
|
140,485 |
|
|
Amortization of other intangible assets from acquisitions
|
|
|
50,048 |
|
|
|
|
|
|
|
50,048 |
|
|
Impairment of equity investments
|
|
|
236 |
|
|
|
|
|
|
|
236 |
|
|
Write-off of property and equipment
|
|
|
1,332 |
|
|
|
|
|
|
|
1,332 |
|
|
Amortization of deferred stock-based compensation
|
|
|
16,174 |
|
|
|
|
|
|
|
16,174 |
|
|
Write-off of acquired in-process research and development
|
|
|
284,000 |
|
|
|
|
|
|
|
284,000 |
|
|
Deferred income taxes
|
|
|
(103,384 |
) |
|
|
|
|
|
|
(103,384 |
) |
|
Income tax benefit from stock options
|
|
|
61,621 |
|
|
|
|
|
|
|
61,621 |
|
|
Net changes in assets and liabilities, excluding effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
|
109,547 |
|
|
|
|
|
|
|
109,547 |
|
|
|
Inventories
|
|
|
4,632 |
|
|
|
|
|
|
|
4,632 |
|
|
|
Other current assets
|
|
|
(55,874 |
) |
|
|
|
|
|
|
(55,874 |
) |
|
|
Other long-term assets
|
|
|
4,600 |
|
|
|
|
|
|
|
4,600 |
|
|
|
Accounts payable
|
|
|
49,806 |
|
|
|
|
|
|
|
49,806 |
|
|
|
Accrued compensation and benefits
|
|
|
(44,296 |
) |
|
|
|
|
|
|
(44,296 |
) |
|
|
Deferred revenue
|
|
|
47,702 |
|
|
|
|
|
|
|
47,702 |
|
|
|
Other accrued expenses
|
|
|
127,072 |
|
|
|
(144,838 |
) |
|
|
(17,766 |
) |
|
|
Income taxes payable
|
|
|
(17,884 |
) |
|
|
|
|
|
|
(17,884 |
) |
|
|
Other long-term obligations
|
|
|
(14,760 |
) |
|
|
|
|
|
|
(14,760 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
674,107 |
|
|
|
(144,838 |
) |
|
|
529,269 |
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(81,733 |
) |
|
|
|
|
|
|
(81,733 |
) |
|
Cash acquired in (payments for) business combinations
|
|
|
1,122,854 |
|
|
|
|
|
|
|
1,122,854 |
|
|
Purchase of equity investments
|
|
|
(6,483 |
) |
|
|
|
|
|
|
(6,483 |
) |
|
Purchases of marketable securities
|
|
|
(1,651,282 |
) |
|
|
|
|
|
|
(1,651,282 |
) |
|
Proceeds from sale of marketable securities
|
|
|
2,918,020 |
|
|
|
|
|
|
|
2,918,020 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
2,301,376 |
|
|
|
|
|
|
|
2,301,376 |
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(1,825,043 |
) |
|
|
144,838 |
|
|
|
(1,680,205 |
) |
|
Net proceeds from sales of common stock under employee benefit
plans
|
|
|
80,655 |
|
|
|
|
|
|
|
80,655 |
|
|
Repayment of line of credit
|
|
|
(491,462 |
) |
|
|
|
|
|
|
(491,462 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,235,850 |
) |
|
|
144,838 |
|
|
|
(2,091,012 |
) |
Effect of exchange rate fluctuations on cash and cash equivalents
|
|
|
(24,660 |
) |
|
|
|
|
|
|
(24,660 |
) |
Increase in cash and cash equivalents
|
|
|
714,973 |
|
|
|
|
|
|
|
714,973 |
|
Beginning cash and cash equivalents
|
|
|
1,091,433 |
|
|
|
|
|
|
|
1,091,433 |
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$ |
1,806,406 |
|
|
$ |
|
|
|
$ |
1,806,406 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock and stock options for business
combination
|
|
$ |
13,197 |
|
|
$ |
13,183,653 |
|
|
$ |
13,196,850 |
|
|
|
|
|
|
|
|
|
|
|
|
Payable for repurchases of common stock
|
|
$ |
|
|
|
$ |
144,838 |
|
|
$ |
144,838 |
|
|
|
|
|
|
|
|
|
|
|
16
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3. |
Balance Sheet Information |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
March 31, | |
|
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Trade accounts receivable, net:
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
$ |
450,101 |
|
|
$ |
289,993 |
|
|
Less: allowance for doubtful accounts
|
|
|
(5,981 |
) |
|
|
(4,668 |
) |
|
|
|
|
|
|
|
|
|
$ |
444,120 |
|
|
$ |
285,325 |
|
|
|
|
|
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
Computer hardware and software
|
|
$ |
577,816 |
|
|
$ |
419,127 |
|
|
Office furniture and equipment
|
|
|
138,292 |
|
|
|
82,310 |
|
|
Buildings
|
|
|
351,652 |
|
|
|
156,472 |
|
|
Leasehold improvements
|
|
|
178,271 |
|
|
|
100,881 |
|
|
|
|
|
|
|
|
|
|
|
1,246,031 |
|
|
|
758,790 |
|
|
Less: accumulated depreciation and amortization
|
|
|
(508,387 |
) |
|
|
(433,265 |
) |
|
|
|
|
|
|
|
|
|
|
737,644 |
|
|
|
325,525 |
|
|
Land
|
|
|
125,572 |
|
|
|
57,164 |
|
|
|
|
|
|
|
|
|
|
$ |
863,216 |
|
|
$ |
382,689 |
|
|
|
|
|
|
|
|
|
|
Note 4. |
Accumulated Other Comprehensive Income |
The components of comprehensive income (loss), net of tax, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net income (loss)
|
|
$ |
(251,328 |
) |
|
$ |
135,623 |
|
|
$ |
(52,695 |
) |
|
$ |
252,900 |
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized loss on available-for-sale securities, net
of tax
|
|
|
(4,317 |
) |
|
|
(1,005 |
) |
|
|
(4,568 |
) |
|
|
(940 |
) |
|
Change in cumulative translation adjustment, net of tax
|
|
|
1,473 |
|
|
|
16,895 |
|
|
|
(27,006 |
) |
|
|
25,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(2,844 |
) |
|
|
15,890 |
|
|
|
(31,574 |
) |
|
|
25,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
(254,172 |
) |
|
$ |
151,513 |
|
|
$ |
(84,269 |
) |
|
$ |
277,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income as of September 30,
2005 and 2004 consists primarily of foreign currency translation
adjustments, net of taxes. Unrealized gains and losses on
available-for-sale securities, net of taxes, are insignificant
for all periods presented.
|
|
Note 5. |
Business Combinations |
Acquisition of VERITAS Software Corporation
On July 2, 2005, we completed our acquisition of VERITAS, a
leading provider of software and services to enable utility
computing, whereby VERITAS became a wholly owned subsidiary of
Symantec in a transaction accounted for using the purchase
method of accounting. The total estimated purchase price of
17
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximately $13 billion includes Symantec common stock
valued at $12 billion, assumed stock options and RSUs with
a fair value of $699 million, and estimated acquisition
related expenses of $40 million. The acquisition of VERITAS
will enable us to provide enterprise customers with a more
effective way to secure and manage their most valuable asset,
their information. The combined company offers customers a broad
portfolio of leading software and solutions across all tiers of
the infrastructure. In addition, bringing the market leading
capabilities of Symantec and VERITAS together improves our
ability to continuously optimize performance and help companies
recover from disruptions when they occur.
As a result of the acquisition, we issued approximately
483 million shares of Symantec common stock, net of
treasury stock retained, based on an exchange ratio of
1.1242 shares of Symantec common stock for each outstanding
share of VERITAS common stock as of July 2, 2005. The
common stock issued had a fair value of $12 billion and was
valued using the average closing price of our common stock of
$25.87 over a range of trading days (December 14, 2004
through December 20, 2004, inclusive) around the
announcement date (December 16, 2004) of the transaction.
Under the terms of the agreement, we also assumed each
outstanding option to purchase VERITAS common stock with an
exercise price equal to or less than $49.00 as well as each
additional option required to be assumed by applicable law. Each
option assumed was converted into an option to purchase Symantec
common stock after applying the exchange ratio. All other
options to purchase shares of VERITAS common stock not exercised
prior to the acquisition were cancelled immediately prior to the
acquisition and were not converted or assumed by Symantec. In
total, we assumed and converted VERITAS options into options to
purchase 66 million shares of Symantec common stock.
In addition, we assumed and converted all outstanding VERITAS
RSUs into approximately 425,000 Symantec RSUs, based upon the
exchange ratio.
Acquisition related costs of $40 million consist of
$32 million for accounting, legal, and other professional
fees and $8 million of restructuring costs for severance,
associated benefits, outplacement services, and excess
facilities. Total cash outlays as of September 30, 2005
were approximately $32 million for accounting, legal, and
other professional fees and $1 million of restructuring
costs for severance, associated benefits, outplacement services,
and excess facilities. Acquisition related costs are included in
other accrued expenses in the Condensed Consolidated Balance
Sheet.
The total purchase price of the acquisition is as follows (in
thousands):
|
|
|
|
|
|
Value of Symantec stock issued
|
|
$ |
12,498,336 |
|
Estimated fair value of options assumed and RSUs exchanged
|
|
|
698,514 |
|
Acquisition related expenses
|
|
|
40,320 |
|
|
|
|
|
|
Total purchase price
|
|
$ |
13,237,170 |
|
|
|
|
|
The acquisition was structured to qualify as a tax-free
reorganization and we will account for the acquisition using the
purchase method of accounting. The results of operations of
VERITAS have been included in our results of operations
beginning on July 2, 2005 and had a significant impact on
our revenues, cost of revenues, and operating expenses for the
September 2005 quarter.
|
|
|
Purchase Price Allocation |
In accordance with SFAS No. 141, the total purchase
price was allocated to VERITAS net tangible and intangible
assets based upon their estimated fair values as of July 2,
2005. The excess purchase price over the net tangible and
identifiable intangible assets was recorded as goodwill. The
fair values assigned to tangible and intangible assets acquired
and liabilities assumed are based on estimates and assumptions
provided by
18
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
management. The following represents the allocation of the
purchase price to the acquired net assets of VERITAS and the
associated estimated useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
|
Amount | |
|
Useful Life | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
Net tangible assets
|
|
$ |
2,373,811 |
|
|
|
n/a |
|
Identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
Acquired product rights
|
|
|
1,301,600 |
|
|
|
4 to 5 years(1) |
|
|
Customer contracts and relationships
|
|
|
1,419,000 |
|
|
|
8 years |
|
|
Tradename
|
|
|
96,800 |
|
|
|
10 years |
|
Goodwill
|
|
|
8,564,358 |
|
|
|
n/a |
|
In-process research and development
|
|
|
284,000 |
|
|
|
n/a |
|
Deferred stock-based compensation
|
|
|
63,092 |
|
|
|
2.8 years(2) |
|
Deferred tax liability
|
|
$ |
(865,491 |
) |
|
|
n/a |
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$ |
13,237,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The VERITAS backlog included in acquired product rights was
amortized into cost of revenues in the September 2005 quarter. |
|
(2) |
Estimated weighted-average remaining vesting period. |
The purchase price allocation is preliminary primarily pending
the analysis of restructuring costs and income taxes.
VERITAS tangible assets and liabilities as of July 2,
2005 were reviewed and adjusted to their fair value as
necessary, including a write down in the amount of
$113 million relating to land owned in various locations.
In connection with the acquisition of VERITAS, we assumed
VERITAS contractual obligations related to its deferred
revenue. VERITAS deferred revenue was derived from
licenses, maintenance, consulting, education, and other
services. We estimated our obligation related to the VERITAS
deferred revenue using the cost
build-up approach. The
cost build-up approach
determines fair value by estimating the costs relating to
fulfilling the obligation plus a normal profit margin. The sum
of the costs and operating profit approximates, in theory, the
amount that we would be required to pay a third party to assume
the support obligation. The estimated costs to fulfill the
support obligation were based on the historical direct costs
related to providing the support. As a result, we recorded an
adjustment to reduce the carrying value of deferred revenue by
$359 million to $173 million, which represents our
estimate of the fair value of the contractual obligations
assumed.
|
|
|
Identifiable Intangible Assets |
Acquired product rights include developed and core technology,
patents, and backlog. Developed technology relates to
VERITAS products across all of their product lines that
have reached technological feasibility. Core technology and
patents represent a combination of VERITAS processes, patents,
and trade secrets developed through years of experience in
design and development of their products. Backlog relates to
firm customer orders that generally are scheduled for delivery
within the next quarter, as well as OEM revenues that are
reported in the next quarter. We amortized the fair value of the
backlog to Cost of revenues
19
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in the September 2005 quarter. We will amortize the fair value
of all other acquired product rights to Cost of revenues on a
straight-line basis over their estimated lives of four to five
years.
Customer contracts and relationships represent existing
contracts that relate primarily to underlying customer
relationships. We will amortize the fair value of these assets
to operating expenses in the Condensed Consolidated Statement of
Operations on a straight-line basis over an average estimated
life of 8 years.
Trade names relate to the VERITAS product names that will
continue in use. We will amortize the fair value of these assets
to operating expenses in the Condensed Consolidated Statement of
Operations on a straight-line basis over an estimated life of
10 years.
Approximately $9 billion of the purchase price has been
allocated to goodwill. Goodwill represents the excess of the
purchase price over the fair value of the underlying net
tangible and intangible assets. The goodwill was attributed to
the premium paid for the opportunity to expand and better serve
the addressable market and achieve greater long-term growth
opportunities than either company had operating alone. We expect
that the combined company will be better positioned to deliver
security and availability solutions across all platforms, from
the desktop to the data center, to customers ranging from
consumers and small businesses to large organizations and
service providers. Goodwill recorded as a result of this
acquisition is not expected to be deductible for tax purposes.
In accordance with SFAS No. 142, goodwill will not be
amortized but instead will be tested for impairment at least
annually (more frequently if certain indicators are present). In
the event that management determines that the value of goodwill
has become impaired, we would incur an accounting charge for the
amount of impairment during the fiscal quarter in which the
determination is made.
|
|
|
In-Process Research and Development (IPR&D) |
We wrote off acquired IPR&D totaling $284 million in
connection with our acquisition of VERITAS. The IPR&D was
written off because acquired technologies had not reached
technological feasibility and had no alternative uses. At the
time of the acquisition, VERITAS was developing new products in
multiple product areas that qualify as IPR&D. These efforts
included NetBackup 6.1, Backup Exec 11.0, Server Management 5.0,
and various other projects. Projects that qualify as IPR&D
represent those that have not yet reached technological
feasibility. Technological feasibility is defined as being
equivalent to completion of a beta-phase working prototype in
which there is no remaining risk relating to the development. At
the time of the acquisition, it was estimated that these
IPR&D efforts would be completed over the next 12 to
18 months at an estimated total cost of $120 million.
At September 30, 2005, the development efforts were
continuing on schedule with no significant additional costs.
The value assigned to IPR&D was determined by estimating
costs to develop the purchased IPR&D into commercially
viable products, estimating the resulting net cash flows from
the projects when completed, and discounting the net cash flows
to their present value. The revenue estimates used in the net
cash flow forecasts were based on estimates of relevant market
sizes and growth factors, expected trends in technology, and the
nature and expected timing of new product introductions by
VERITAS and its competitors.
The rate utilized to discount the net cash flows to their
present value was based on VERITAS weighted average cost
of capital. The weighted average cost of capital was adjusted to
reflect the difficulties and uncertainties in completing each
project and thereby achieving technological feasibility, the
percentage of completion of each project, anticipated market
acceptance and penetration, market growth rates, and risks
related to the impact of potential changes in future target
markets. Based on these factors, a discount rate of 13.5% was
deemed appropriate for valuing the IPR&D.
20
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimates used in valuing IPR&D were based upon
assumptions believed to be reasonable but which are inherently
uncertain and unpredictable. Assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances may occur.
We assumed VERITAS stock options and RSUs, and converted
them into stock options to purchase 66 million shares
of Symantec common stock and 425,000 Symantec RSUs. The fair
value of the assumed stock options was $688 million using
the Black-Scholes valuation model with the following weighted
average assumptions: volatility of 36%, risk-free interest rate
of 3.4%, expected life of 3.5 years, and dividend yield of
zero. The fair value of the RSUs was $11 million based on
the fair value of the underlying shares on the announcement
date. The intrinsic value of the unvested options and RSUs was
valued at $63 million and was recorded in Deferred
stock-based compensation within Stockholders equity in the
Condensed Consolidated Balance Sheets. The difference between
the fair value and the intrinsic value of the unvested portion
of the options and RSUs was $636 million and was included
in the purchase price consideration.
The deferred stock-based compensation is being amortized to
operating expense over the remaining vesting periods of the
underlying options or RSUs on a straight-line basis. During the
period from the acquisition date through September 30,
2005, certain unvested options and RSUs were cancelled as a
result of employee terminations, and deferred stock-based
compensation was reduced by $6 million. We recorded
amortization of deferred stock-based compensation from the
VERITAS transaction of $11 million during the three months
ended September 30, 2005.
We have recognized deferred tax assets and liabilities for the
tax effects of differences between assigned values in the
purchase price and the tax bases of assets acquired and
liabilities assumed. A significant portion of the net deferred
tax liability in the purchase price allocation is attributable
to the tax effect of the difference between the assigned value
of identified intangible assets and their tax bases. In
determining the tax effect of these basis differences, we have
taken into account the allocation of these identified
intangibles among different taxing jurisdictions, including
those with nominal or zero percent tax rates.
In connection with the acquisition of VERITAS, we assumed a
short-term loan with a principal amount of EURO
411 million. The entire balance of the short-term loan was
paid off on July 7, 2005.
The following table presents pro forma results of operations of
Symantec and VERITAS, as though the companies had been combined
as of the beginning of the earliest period presented. The
unaudited pro forma results of operations are not necessarily
indicative of results that would have occurred had the
acquisition taken place on April 1, 2004 or of results that
may occur in the future. Net income includes amortization of
intangible assets related to the acquisition of
$119 million per quarter and amortization of deferred
compensation of $6 million per quarter. Net income also
includes amortization of backlog of $46 million for the six
months ended September 30, 2004. We excluded the effect of
the purchase accounting adjustment to
21
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reduce the carrying value of deferred revenue and the write-off
of acquired IPR&D of $284 million for all periods
presented. The unaudited pro forma information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
Three Months Ended | |
|
September 30, | |
|
|
September 30, | |
|
| |
|
|
2004(a) | |
|
2005(b) | |
|
2004(c) | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Net revenues
|
|
$ |
1,103,347 |
|
|
$ |
2,315,064 |
|
|
$ |
2,145,728 |
|
Net income
|
|
$ |
130,982 |
|
|
$ |
217,813 |
|
|
$ |
222,921 |
|
Basic net income per share
|
|
$ |
0.12 |
|
|
$ |
0.23 |
|
|
$ |
0.20 |
|
Diluted net income per share
|
|
$ |
0.11 |
|
|
$ |
0.22 |
|
|
$ |
0.19 |
|
|
|
(a) |
The results of operations include our results for the three
months ended September 30, 2004 and VERITAS
historical results for the three months ended June 30,
2004, including amortization related to fair value adjustments
based on the fair values of assets acquired and liabilities
assumed as of the acquisition date of July 2, 2005. |
|
(b) |
The results of operations include our results for the six months
ended September 30, 2005, including VERITAS beginning from
July 2, 2005, and VERITAS historical results for the
three months ended March 31, 2005, including amortization
related to fair value adjustments based on the fair values of
assets acquired and liabilities assumed as of the acquisition
date of July 2, 2005. |
|
(c) |
The results of operations include our results for the six months
ended September 30, 2004 and VERITAS historical
results for the six months ended June 30, 2004, including
amortization related to fair value adjustments based on the fair
values of assets acquired and liabilities assumed as of the
acquisition date of July 2, 2005. |
Other acquisitions
In 2005, we completed our acquisition of XtreamLok for
$18 million in cash, including an insignificant amount for
acquisition-related expenses resulting from financial advisory,
legal, and accounting services. The purchase price was allocated
to goodwill of $15 million, acquired product rights of
$4 million, deferred tax liabilities of $1 million and
an insignificant amount of net of tangible liabilities. The
amounts allocated to acquired product rights are being amortized
to Cost of revenues in the Condensed Consolidated Statements of
Operations over their useful lives of five years.
XtreamLoks results of operations have been included in our
results of operations within the Consumer Products segment since
its date of acquisition. The financial results of XtreamLok are
considered insignificant for purposes of pro forma financial
disclosure.
For additional acquisitions completed subsequent to
September 30, 2005, see Note 13 to the Condensed
Consolidated Financial Statements.
22
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 6. |
Goodwill, Acquired Product Rights, and Other Intangible
Assets |
Goodwill by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage & | |
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise | |
|
Server | |
|
Data |
|
|
|
Consumer | |
|
|
|
Total | |
|
|
Security | |
|
Management | |
|
Protection |
|
Services | |
|
Products | |
|
Unallocated | |
|
Company | |
|
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance as of March 31, 2005
|
|
$ |
1,017,622 |
|
|
$ |
193,192 |
|
|
$ |
|
|
|
$ |
149,183 |
|
|
$ |
5,216 |
|
|
$ |
|
|
|
$ |
1,365,213 |
|
Goodwill acquired through the VERITAS acquisition(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,564,358 |
|
|
|
8,564,358 |
|
Goodwill acquired through other acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,132 |
|
|
|
|
|
|
|
15,132 |
|
Operating segment reclassification(a)
|
|
|
116,543 |
|
|
|
|
|
|
|
|
|
|
|
(116,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill adjustments(b)
|
|
|
(8,928 |
) |
|
|
405 |
|
|
|
|
|
|
|
(2,404 |
) |
|
|
|
|
|
|
|
|
|
|
(10,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2005
|
|
$ |
1,125,237 |
|
|
$ |
193,597 |
|
|
$ |
|
|
|
$ |
30,236 |
|
|
$ |
20,348 |
|
|
$ |
8,564,358 |
|
|
$ |
9,933,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Goodwill is tested for impairment on an annual basis during the
March quarter, or earlier if indicators of impairment exist.
During the June 2005 quarter, we reclassified our operating
segments as described in Note 12 to the Condensed
Consolidated Financial Statements, tested our goodwill for
impairment under the new segment structure, and determined that
there was no impairment of goodwill. We will continue to test
for impairment during the March quarter of each year, or earlier
if indicators of impairment exist. |
|
(b) |
|
During the June and September 2005 quarters, we adjusted the
goodwill related to a number of prior acquisitions for
individually insignificant amounts based on final income tax
returns and continued post-closing review. |
|
(c) |
|
The allocation of goodwill acquired through the VERITAS
acquisition has not yet been completed and is expected to be
completed by the end of fiscal year 2006. |
Acquired product rights subject to amortization are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
| |
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
Net Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Acquired product rights, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$ |
1,508,578 |
|
|
$ |
(257,795 |
) |
|
$ |
1,250,783 |
|
|
Patents
|
|
|
54,559 |
|
|
|
(15,442 |
) |
|
|
39,117 |
|
|
Backlog and other
|
|
|
60,661 |
|
|
|
(56,187 |
) |
|
|
4,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,623,798 |
|
|
$ |
(329,424 |
) |
|
$ |
1,294,374 |
|
|
|
|
|
|
|
|
|
|
|
23
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On May 12, 2005, we resolved the Altiris patent litigation
matters with a cross-licensing agreement that resolved all legal
claims between the companies. As part of the settlement, we paid
Altiris $10 million for use of the disputed technology.
Under the transaction, we expensed $2 million of patent
settlement costs in the June 2005 quarter that was related to
benefits we received in and prior to the June 2005 quarter. The
remaining $8 million was capitalized and is being amortized
to Cost of revenues in the Condensed Consolidated Statements of
Operations over the remaining life of the primary patent, which
expires in May 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2005 | |
|
|
| |
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
Net Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Acquired product rights, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$ |
243,958 |
|
|
$ |
(167,061 |
) |
|
$ |
76,897 |
|
|
Patents
|
|
|
53,559 |
|
|
|
(11,030 |
) |
|
|
42,529 |
|
|
Backlog and other
|
|
|
14,761 |
|
|
|
(6,568 |
) |
|
|
8,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
312,278 |
|
|
$ |
(184,659 |
) |
|
$ |
127,619 |
|
|
|
|
|
|
|
|
|
|
|
During the three-month periods ended September 30, 2005 and
2004, amortization expense for acquired product rights was
$129 million and $13 million, respectively. During the
six-month periods ended September 30, 2005 and 2004,
amortization expense for acquired product rights was
$140 million and $24 million, respectively.
Amortization expense for acquired product rights, based upon our
existing acquired product rights and their current useful lives,
is estimated to be the following as of September 30, 2005:
|
|
|
|
|
Fiscal period:
|
|
|
|
|
Last two quarters of 2006
|
|
$ |
166 million |
|
2007
|
|
$ |
320 million |
|
2008
|
|
$ |
312 million |
|
2009
|
|
$ |
306 million |
|
2010
|
|
$ |
158 million |
|
2011
|
|
$ |
31 million |
|
Thereafter
|
|
$ |
1 million |
|
Other intangible assets subject to amortization are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
| |
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
Net Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Other intangible assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer base
|
|
$ |
1,455,838 |
|
|
$ |
(54,420 |
) |
|
$ |
1,401,418 |
|
|
Trade name
|
|
|
104,406 |
|
|
|
(9,744 |
) |
|
|
94,662 |
|
|
Marketing-related assets
|
|
|
2,100 |
|
|
|
(1,663 |
) |
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,562,344 |
|
|
$ |
(65,827 |
) |
|
$ |
1,496,517 |
|
|
|
|
|
|
|
|
|
|
|
24
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2005 | |
|
|
| |
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
Net Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Other intangible assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer base
|
|
$ |
36,898 |
|
|
$ |
(7,543 |
) |
|
$ |
29,355 |
|
|
Trade name
|
|
|
7,606 |
|
|
|
(6,922 |
) |
|
|
684 |
|
|
Marketing-related assets
|
|
|
2,100 |
|
|
|
(1,400 |
) |
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
46,604 |
|
|
$ |
(15,865 |
) |
|
$ |
30,739 |
|
|
|
|
|
|
|
|
|
|
|
During the three-month periods ended September 30, 2005 and
2004, amortization expense for other intangible assets was
$48 million and $1 million, respectively. During the
six-month periods ended September 30, 2005 and 2004,
amortization expense for other intangible assets was
$50 million and $2 million, respectively. Amortization
of other intangible assets was included in Operating expenses in
the Condensed Consolidated Statements of Operations.
Amortization expense for other intangible assets, based upon our
existing other intangible assets and their current useful lives,
is estimated to be the following as of September 30, 2005:
|
|
|
|
|
Fiscal period:
|
|
|
|
|
Last two quarters of 2006
|
|
$ |
97 million |
|
2007
|
|
$ |
192 million |
|
2008
|
|
$ |
192 million |
|
2009
|
|
$ |
192 million |
|
2010
|
|
$ |
190 million |
|
2011
|
|
$ |
190 million |
|
Thereafter
|
|
$ |
444 million |
|
|
|
Note 7. |
Convertible Subordinated Notes |
In connection with the acquisition of VERITAS, we assumed the
VERITAS 0.25% convertible subordinated notes. In August
2003, VERITAS issued $520 million of 0.25% convertible
subordinated notes due August 1, 2013, or 0.25% Notes,
to several initial purchasers in a private offering. The
0.25% Notes were issued at their face value and provide for
semi-annual interest payments of an insignificant amount each
February 1 and August 1, beginning February 1, 2004.
On July 2, 2005, in connection with the acquisition,
VERITAS, Symantec and U.S. Bank National Association, as
Trustee, entered into a Second Supplemental Indenture. As a
result of the Second Supplemental Indenture, the
0.25% Notes became convertible, under specified
circumstances, into shares of common stock of Symantec at a
conversion rate of 24.37288 shares per $1,000 principal
amount of notes, which is equivalent to a conversion price of
approximately $41.03 per share of Symantec common stock.
Symantec agreed to fully and unconditionally guarantee all of
VERITAS obligations under the 0.25% Notes and the
indenture, including all payments of principal and interest.
The conversion rate of the 0.25% Notes is subject to
adjustment upon the occurrence of specified events. On or after
August 5, 2006, Symantec has the option to redeem all or a
portion of the 0.25% Notes at a redemption price equal to
100% of the principal amount, plus accrued and unpaid interest.
On August 1, 2006 and August 1, 2008, or upon the
occurrence of a fundamental change involving Symantec, holders
of the 0.25% Notes may require Symantec to repurchase their
notes at a repurchase price equal to 100% of the principal
amount, plus accrued and unpaid interest.
25
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Standard & Poors withdrew its corporate credit
rating for VERITAS on July 6, 2005 and, as a result, the
notes are currently convertible into shares of Symantec common
stock at the option of the holder. If any holder elected to
convert, Symantec would pay the holder the cash value of the
applicable number of shares of Symantec common stock
($22.66 per share at September 30, 2005), up to the
principal amount of the note in accordance with the terms of a
supplemental indenture dated as of October 25, 2004.
Amounts in excess of the principal amount, if any, may be paid
in cash or in stock at Symantecs option. As of the
acquisition of VERITAS, the fair value of the 0.25% Notes
was $496 million. We will accrete the value of the
0.25% Notes to their face value by the first date that
holders may require us to repurchase the 0.25% Notes. The
book value of the 0.25% Notes was $502 million as of
September 30, 2005.
|
|
Note 8. |
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, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Basic Net Income (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(251,328 |
) |
|
$ |
135,623 |
|
|
$ |
(52,695 |
) |
|
$ |
252,900 |
|
Weighted average number of common shares outstanding during the
period
|
|
|
1,172,130 |
|
|
|
629,730 |
|
|
|
941,727 |
|
|
|
627,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$ |
(0.21 |
) |
|
$ |
0.22 |
|
|
$ |
(0.06 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Income (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(251,328 |
) |
|
$ |
135,623 |
|
|
$ |
(52,695 |
) |
|
$ |
252,900 |
|
Interest on convertible subordinated notes, net of income tax
effect
|
|
|
|
|
|
|
3,598 |
|
|
|
|
|
|
|
7,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as adjusted
|
|
|
(251,328 |
) |
|
|
139,221 |
|
|
|
(52,695 |
) |
|
|
260,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the
period
|
|
|
1,172,130 |
|
|
|
629,730 |
|
|
|
941,727 |
|
|
|
627,124 |
|
Shares issuable from assumed exercise of options using the
treasury stock method
|
|
|
|
|
|
|
36,518 |
|
|
|
|
|
|
|
38,230 |
|
Shares issuable from assumed conversion of convertible
subordinated notes
|
|
|
|
|
|
|
70,290 |
|
|
|
|
|
|
|
70,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares for purposes of calculating diluted net income
(loss) per share
|
|
|
1,172,130 |
|
|
|
736,538 |
|
|
|
941,727 |
|
|
|
735,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share(1)
|
|
$ |
(0.21 |
) |
|
$ |
0.19 |
|
|
$ |
(0.06 |
) |
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
For the three and six months ended September 30, 2004,
diluted net income per share is calculated using the
if-converted method. Under this method, the numerator excludes
the interest expense from the 3% convertible subordinated
notes, net of income tax, of $3.6 million and
$7.2 million for the three and six months ended
September 30, 2004, respectively, and the denominator
includes shares issuable from the assumed conversion of the
3% convertible subordinated notes. |
26
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Potential common shares consist of employee stock options and
shares issuable upon conversion of the 0.25% Notes. The
following table sets forth the potential common shares that were
excluded from the diluted net income (loss) per share
computations because their inclusion would have been
antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Employee stock options outstanding
|
|
|
126,673 |
(2) |
|
|
766 |
(1) |
|
|
126,673 |
(2) |
|
|
699 |
(1) |
0.25% convertible subordinated notes
|
|
|
12,674 |
(3) |
|
|
|
|
|
|
12,674 |
(3) |
|
|
|
|
|
|
(1) |
These employee stock options were excluded from the computation
of diluted net income per share because the exercise price was
greater than the average market price of our common stock during
the period, and therefore the effect is antidilutive. |
|
(2) |
All employee stock options were excluded from the computation of
diluted net loss per share because the effect is antidilutive. |
|
(3) |
Potential common shares related to 0.25% Notes were
excluded from the computation of diluted net income (loss) per
share because the effective conversion price was higher than the
average market price of our common stock during the period, and
therefore the effect is antidilutive. |
|
|
Note 9. |
Stock Transactions |
On January 16, 2001, the Board of Directors approved a plan
to repurchase up to $700 million of Symantec common stock.
The plan had a repurchase limitation of 60 million shares,
and did not have an expiration date. In January 2004, the Board
increased the authorized amount for share repurchases by
$240 million without a repurchase limitation, and increased
that amount again by $300 million in October 2004. On
March 28, 2005, the Board increased the authorized amount
for share repurchases by $3 billion, effective upon
completion of our acquisition of VERITAS on July 2, 2005.
The repurchase plan does not include a repurchase limitation or
an expiration date. We commenced repurchases using the
$3 billion authorization on August 2, 2005 and
anticipate completing all repurchases under this authorization
by the end of November 2005. As of September 30, 2005,
approximately $2 billion remained authorized for stock
repurchases.
During the six-month period ended September 30, 2005, we
repurchased 84 million shares at prices ranging from $18.33
to $22.51 per share for an aggregate amount of $2 billion.
During the six-month period ended September 30, 2004, we
repurchased 5 million shares at prices ranging from $21.42
to $24.62 per share for an aggregate amount of
$120 million. In connection with stock repurchases, we
incurred reductions of $1 million, $2 billion, and
$50 million in Common stock, Capital in excess of par
value, and Retained earnings, respectively, for the six months
ended September 30, 2005.
During the period from October 1, 2005 to November 7,
2005, we repurchased 49 million shares at prices ranging
from $18.76 to $23.85 per share for an aggregate amount of
$1 billion.
|
|
|
Increase to Authorized Shares |
On June 24, 2005, our stockholders approved the adoption of
our amended certificate of incorporation that increased the
number of authorized shares of common stock from 1,600,000,000
to 3,000,000,000. The increase was sought in order to carry out
our acquisition of VERITAS and provide us with the flexibility
to meet business needs and opportunities.
27
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of September 30, 2005, we had a restructuring reserve of
$54 million, of which $25 million was included in
Other accrued expenses in the Condensed Consolidated Balance
Sheet and $29 million was included in Other long-term
liabilities in the Condensed Consolidated Balance Sheet. The
restructuring reserve consists of $50 million related to a
restructuring reserve assumed from VERITAS in connection with
the acquisition, $2 million related to restructuring costs
as a result of the VERITAS acquisition, and $2 million
related to our fiscal 2002 restructuring plan.
In connection with the VERITAS acquisition, we assumed a
restructuring reserve for $53 million related to the 2002
VERITAS facility restructuring plan. During the quarter ended
September 30, 2005, we paid $3 million related to this
reserve. The remaining reserve amount of $50 million will
be paid over the remaining lease terms, ending at various dates
through 2022. The majority of costs are currently scheduled to
be paid by the year ending December 31, 2010.
The estimates related to the 2002 VERITAS restructuring reserve
may vary significantly depending, in part, on the commercial
real estate market in the applicable metropolitan areas, our
ability to obtain subleases related to these facilities and the
time period to do so, the sublease rental market rates, and the
outcome of negotiations with lessors regarding terminations of
some of the leases. Some of these factors are beyond our
control. Adjustments to the 2002 VERITAS restructuring reserve
will be made if actual lease exit costs or sublease income
differ materially from amounts currently expected.
During the three months ended September 30, 2005, we
recorded $1 million of restructuring costs as a result of
the VERITAS acquisition, which related to excess facilities
costs, severance, associated benefits, and outplacement
services. During the six months ended September 30, 2005,
we recorded $5 million of restructuring costs, of which
$1 million related to excess facilities costs and
$4 million related to severance, associated benefits, and
outplacement services. These restructuring costs reflect the
termination of redundant employees and the consolidation of
certain facilities as a result of the VERITAS acquisition.
During the three and six months ended September 30, 2005,
payments of $1 million and $3 million, respectively,
were made against the restructuring reserve. We expect the
remaining balance to be paid by the end of fiscal 2006.
See Note 5 for information on the acquisition related costs
incurred in connection with the VERITAS acquisition.
The fiscal 2002 restructuring reserve consists of the costs of
excess facilities in Europe and Eugene, Oregon, net of sublease
income. During the three and six months ended September 30,
2005, no significant amounts were paid and we expect the
remaining reserve balance to be utilized by the end of fiscal
2007.
On August 26, 2004, SRI International, Inc. filed a lawsuit
against us in the United States District Court, District of
Delaware, alleging that unspecified Symantec products, including
ManHunt, infringed four patents owned by SRI. The lawsuit
requests damages, injunctive relief, costs, and attorneys
fees. We intend to vigorously defend this action.
On November 17, 2003, Health & Sport LLC filed a
lawsuit on behalf of itself and purportedly on behalf of the
general public and a class including purchasers of Norton
AntiVirus 2004 and/or Norton Internet Security 2004 in the
California Superior Court, San Francisco County. This case
was subsequently moved to Santa Clara County. The complaint
alleges violations of California Business and Professions Code
17200 and 17500 and breach of express and implied warranties in
connection with the specified products. The complaint seeks
damages and injunctive and other equitable relief, as well as
costs and attorneys fees. We have reached an agreement in
principle, subject to court approval, to settle the matter with
no material payment by us.
28
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On March 28, 2003, Ronald Pearce filed a lawsuit on behalf
of himself and purportedly on behalf of the general public of
the United States and Canada in the California Superior Court,
Santa Clara County, alleging violations of California
Business and Professions Code section 17200 and false
advertising in connection with our
WinFaxtm
Pro product. The complaint seeks damages and injunctive and
other equitable relief, as well as costs and attorney fees. We
intend to vigorously defend this action.
Since the September quarter of 2002, VERITAS has received
subpoenas issued by the Securities and Exchange Commission, or
SEC, in the investigation entitled In the Matter of AOL/ Time
Warner. The SEC has requested information regarding
transactions with AOL Time Warner, or AOL, and related
accounting and disclosure matters. VERITAS transactions
with AOL, entered into in September 2000, involved a software
and services purchase by AOL at a stated value of
$50 million and the purchase by VERITAS of advertising
services from AOL at a stated value of $20 million. In
March 2003, VERITAS restated its financial statements for 2001
and 2000 to reflect a reduction in revenues and expenses of
$20 million, as well as an additional reduction in revenues
and expenses of $1 million related to two other
contemporaneous transactions with other parties in 2000 that
involved software licenses and the purchase of online
advertising services. In March 2005, the SEC charged AOL with
securities fraud pursuant to a complaint entitled Securities
and Exchange Commission v. Time Warner, Inc. In its
complaint, the SEC described certain transactions between AOL
and a California-based software company that creates and
licenses data storage software that appears to reference
VERITAS transactions with AOL as described above, and
alleged that AOL aided and abetted that California-based
software company in violating Section 10(b) of the
Securities Exchange Act of 1934 and Exchange Act
Rule 10b-5.
In March 2004, VERITAS announced its intention to restate its
financial statements for 2002 and 2001 and to revise previously
announced financial results for 2003. The decision resulted from
the findings of an investigation into past accounting practices
that concluded on March 12, 2004. In the first quarter of
2004, VERITAS voluntarily disclosed to the staff of the SEC past
accounting practices applicable to its 2002 and 2001 financial
statements that were not in compliance with GAAP. In June 2004,
VERITAS restated its financial statements for 2002 and 2001 and
reported revised financial results for 2003.
Prior to our acquisition of VERITAS, VERITAS had been in
discussions with the staff of the SEC regarding the SECs
review of these matters and, based on communications with the
staff, we expect these discussions to result in a settlement
with the SEC in which we would be required to pay a
$30 million penalty. We would be unable to deduct the
$30 million penalty for income tax purposes, be reimbursed
or indemnified for such payment through insurance or any other
source, or use the payment to setoff or reduce any award of
compensatory damages to plaintiffs in related securities
litigation. Final settlement with the SEC is subject to
agreement on final terms and documentation, approval by
Symantecs board of directors, and approval by the SEC
Commissioners. In the March quarter of 2005, VERITAS recorded a
charge of $30 million classified as General and
administrative expense in its Consolidated Statement of
Operations, and a corresponding accrual in other current
liabilities in its balance sheet. As of the filing of our
quarterly report on
Form 10-Q, filed
on November 9, 2005, the terms of the final settlement are
still under consideration by the SEC Commissioners, and have not
been approved. As part of our accounting for the acquisition of
VERITAS, we recorded the accrual of $30 million in Other
current liabilities on our Condensed Consolidated Balance Sheet.
We intend to cooperate with the SEC in its investigation and
review of the foregoing matters.
On August 2, 2004, VERITAS received a copy of an amended
complaint in Stichting Pensioenfonds ABP v. AOL Time
Warner, et. al. in which VERITAS was named as a defendant.
The case was originally filed in the United States District
Court for the Southern District of New York in July 2003 against
Time Warner (formerly, AOL Time Warner), current and former
officers and directors of Time Warner and AOL, and Time
Warners outside auditor, Ernst & Young LLP. The
plaintiff alleges that VERITAS aided and abetted AOL in alleged
common law fraud and also alleges that it engaged in common law
fraud as part of a civil conspiracy. The plaintiff seeks an
unspecified amount of compensatory and punitive damages. On
Novem-
29
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ber 22, 2004, VERITAS filed a motion to dismiss in this
action; the plaintiff filed its opposition on March 4,
2005; and VERITAS filed its reply on April 14, 2005. The
motion remains pending.
On July 7, 2004, a purported class action complaint
entitled Paul Kuck, et al. v. VERITAS Software
Corporation, et al. was filed in the United States
District Court for the District of Delaware. The lawsuit alleges
violations of federal securities laws in connection with
VERITAS announcement on July 6, 2004 that it expected
results of operations for the fiscal quarter ended June 30,
2004 to fall below earlier estimates. The complaint generally
seeks an unspecified amount of damages. Subsequently, additional
purported class action complaints have been filed in Delaware
federal court, and, on March 3, 2005, the Court entered an
order consolidating these actions and appointing lead plaintiffs
and counsel. A consolidated amended complaint, or CAC, was filed
on May 27, 2005, expanding the class period from
April 23, 2004 through July 6, 2004. The CAC also
named another officer as a defendant and added allegations that
VERITAS and the named officers made false or misleading
statements in the companys press releases and SEC filings
regarding the companys financial results, which allegedly
contained revenue recognized from contracts that were unsigned
or lacked essential terms. Defendants filed a motion to dismiss
the CAC on July 20, 2005. The motion remains pending.
We are also involved in a number of other judicial and
administrative proceedings that are incidental to our business.
Although adverse decisions (or settlements) may occur in one or
more of the cases, it is not possible to estimate the possible
loss or losses from each of these 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 or results of operations. We have accrued estimated
legal fees and expenses related to certain of these matters;
however, actual amounts may differ materially from those
estimated amounts.
|
|
Note 12. |
Segment Information |
Our operating segments are significant strategic business units
that offer different products and services, distinguished by
customer needs. We have six operating segments:
|
|
|
|
|
Consumer Products. Our Consumer Products segment
focuses on delivering our Internet security and problem-solving
products to individual users, home offices, and small businesses. |
|
|
|
Enterprise Security. Our Enterprise Security
segment provides security solutions for all tiers of a network:
at the server tier behind the gateway and at the client tier,
including desktop personal computers, or PCs, laptops, and
handhelds. |
|
|
|
Data Protection. Our Data Protection segment
provides software products designed to protect, backup, archive,
and restore data across a broad range of computing environments
from large corporate data centers to remote groups and PC
clients, such as desktop and laptop computers. |
|
|
|
Storage and Server Management. Our Storage and
Server Management segment offers products for optimizing storage
resource utilization, simplifying administration of
heterogeneous storage and server environments, and providing
continuous availability of mission-critical applications and
data. |
|
|
|
Services. Our Services segment provides a full
range of services to assist our customers in assessing,
architecting, implementing, supporting, and maintaining their
security, storage, and infrastructure software solutions. |
|
|
|
Other. Our 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 acquired product
rights, other intangible assets, and other assets, and charges,
such as acquired in-process research and development, patent
settlement, amortization of deferred compensation, and
restructuring, that are not charged to the other operating
segments. |
30
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the quarter ended September 2005, we renamed the
Enterprise Administration segment as the Storage and Server
Management segment and added the Data Protection segment. During
the quarter ended June 2005, we moved Managed Security Services
from the Services segment to the Enterprise Security segment and
moved the services-related revenue from the Storage and Server
Management segment to the Services segment. Net revenues for the
three and six months ended September 30, 2004 have been
reclassified to conform to our current presentation.
Specifically, we reclassified $7 million and
$14 million of Managed Security Services revenue from the
Services segment to the Enterprise Security segment and
$1 million and $3 million of services-related revenue
from the Storage and Server Management segment to the Services
segment during the three and six months ended September 30,
2004, respectively.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies,
with the exception of the amortization of acquired product
rights, which is included entirely in our Other segment. There
are no intersegment sales. Our chief operating decision maker
evaluates performance based on direct profit or loss from
operations before income taxes not including nonrecurring gains
and losses, foreign exchange gains and losses, and miscellaneous
other income and expenses. The majority of our assets and
liabilities are not discretely allocated or reviewed by segment.
The depreciation and amortization of our property, equipment,
and leasehold improvements are allocated based on headcount,
unless specifically identified by segment.
Segment Information
The following table presents a summary of our operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer | |
|
Enterprise | |
|
Data | |
|
Storage & Server | |
|
|
|
|
|
Total | |
|
|
Products | |
|
Security | |
|
Protection | |
|
Management | |
|
Services | |
|
Other | |
|
Company | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Three months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
346,199 |
|
|
$ |
259,257 |
|
|
$ |
208,530 |
|
|
$ |
201,991 |
|
|
$ |
40,408 |
|
|
$ |
(521 |
) |
|
$ |
1,055,864 |
|
Operating income (loss)
|
|
|
236,265 |
|
|
|
100,211 |
|
|
|
115,865 |
|
|
|
85,469 |
|
|
|
(8,666 |
) |
|
|
(787,491 |
) |
|
|
(258,347 |
) |
Depreciation & amortization expense
|
|
|
389 |
|
|
|
5,464 |
|
|
|
2,868 |
|
|
|
5,388 |
|
|
|
1,215 |
|
|
|
226,807 |
|
|
|
242,131 |
|
Three months ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues(1)
|
|
$ |
315,307 |
|
|
$ |
232,932 |
|
|
$ |
|
|
|
$ |
64,629 |
|
|
$ |
5,276 |
|
|
$ |
169 |
|
|
$ |
618,313 |
|
Operating income (loss)
|
|
|
205,084 |
|
|
|
49,844 |
|
|
|
|
|
|
|
28,182 |
|
|
|
(2,353 |
) |
|
|
(88,640 |
) |
|
|
192,117 |
|
Depreciation & amortization expense
|
|
|
926 |
|
|
|
5,624 |
|
|
|
|
|
|
|
497 |
|
|
|
4 |
|
|
|
25,964 |
|
|
|
33,015 |
|
31
SYMANTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer | |
|
Enterprise | |
|
Data | |
|
Storage & Server | |
|
|
|
|
|
Total | |
|
|
Products | |
|
Security | |
|
Protection | |
|
Management | |
|
Services | |
|
Other | |
|
Company | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Six months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
703,153 |
|
|
$ |
525,349 |
|
|
$ |
208,530 |
|
|
$ |
269,044 |
|
|
$ |
50,105 |
|
|
$ |
(375 |
) |
|
$ |
1,755,806 |
|
Operating income (loss)
|
|
|
478,976 |
|
|
|
170,581 |
|
|
|
115,865 |
|
|
|
115,873 |
|
|
|
(15,954 |
) |
|
|
(891,370 |
) |
|
|
(26,029 |
) |
Depreciation & amortization expense
|
|
|
793 |
|
|
|
10,709 |
|
|
|
2,868 |
|
|
|
5,564 |
|
|
|
1,369 |
|
|
|
251,149 |
|
|
|
272,452 |
|
Six months ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues(1)
|
|
$ |
593,619 |
|
|
$ |
444,873 |
|
|
$ |
|
|
|
$ |
125,890 |
|
|
$ |
10,526 |
|
|
$ |
39 |
|
|
$ |
1,174,947 |
|
Operating income (loss)
|
|
|
381,187 |
|
|
|
93,662 |
|
|
|
|
|
|
|
55,513 |
|
|
|
(5,820 |
) |
|
|
(165,167 |
) |
|
|
359,375 |
|
Depreciation & amortization expense
|
|
|
1,809 |
|
|
|
10,388 |
|
|
|
|
|
|
|
919 |
|
|
|
126 |
|
|
|
47,627 |
|
|
|
60,869 |
|
|
|
(1) |
Net revenues for the three and six months ended
September 30, 2004 have been reclassified to conform to
current presentation. Specifically, we reclassified
$7 million and $14 million of Managed Security
Services revenue from the Services segment to the Enterprise
Security segment and $1 million and $3 million of
services-related revenue from the Storage and Server Management
segment to the Services segment during the three and six months
ended September 30, 2004, respectively. |
|
|
Note 13. |
Subsequent Events |
On October 2, 2005, we entered into an agreement to acquire
BindView Development Corporation, a maker of computer-network
management and security software, for an estimated purchase
price of $209 million, excluding acquisition related costs.
The acquisition is expected to close in the fourth quarter of
fiscal 2006, subject to the satisfaction of closing conditions.
On October 5, 2005, we completed the acquisition of
WholeSecurity, Inc., a leading provider of behavior-based
security and anti-phishing technology for $66 million in
cash, including an insignificant amount for acquisition-related
expenses.
On October 10, 2005, we completed the acquisition of Sygate
Technologies, a technology leader in endpoint compliance
solutions for $163 million in cash, including an
insignificant amount for acquisition-related expenses.
32
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
|
|
|
Forward-Looking Statements and Risk Factors |
The discussion below 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, projects, and similar
expressions identify forward-looking statements. In addition,
statements that refer to projections of our future financial
performance, anticipated growth and trends in our businesses and
in our industries, the anticipated impact of our acquisition of
VERITAS Software Corporation and other acquisitions, 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 and may not prove to 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. 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 Risk
Factors beginning on page 53. We encourage you to read
that section carefully.
Overview
We are the world leader in providing solutions to help
individuals and enterprises assure the security, availability,
and integrity of their information. With innovative technology
solutions and services, we help individuals and enterprises
protect and manage their digital assets. We provide a wide range
of solutions including enterprise and consumer security, data
protection, application and infrastructure management, security
management, storage and server management, and response and
managed security services. Founded in 1982, we have operations
in more than 40 countries worldwide.
Restatement of Condensed
Consolidated Financial Statements
Subsequent to the filing of our
Form 10-Q for the
quarter ended September 30, 2005, we identified a
classification error in our Condensed Consolidated Statement of
Cash Flows for the six months ended September 30, 2005 and
determined to reclassify certain items within Net revenues in
our Condensed Consolidated Statements of Operations for the
three and six months ended September 30, 2005 and 2004. As
a result, we have restated the accompanying Condensed
Consolidated Financial Statements for the three and six months
ended September 30, 2005 and 2004 to reflect the correction
of this error and the reclassifications. The restatement has no
impact on our previously reported Net income (loss), Net income
(loss) per share, Cash and cash equivalents, or the Condensed
Consolidated Balance Sheets.
On July 2, 2005, we completed our acquisition of VERITAS
Software Corporation, or VERITAS, a leading provider of software
and services to enable utility computing, whereby VERITAS became
a wholly owned subsidiary of Symantec in a transaction accounted
for using the purchase method. The total estimated purchase
price of $13 billion includes Symantec common stock valued
at $12 billion, assumed stock options and restricted stock
units, or RSUs, with a fair value of $699 million and
estimated acquisition related expenses of $40 million. The
acquisition of VERITAS will enable us to provide enterprise
customers with a more effective way to secure and manage their
most valuable asset, their information. The combined company
offers customers one of the broadest portfolios of leading
software and solutions, on the most complete set of operating
platforms, and across all tiers of the infrastructure. We
believe that this acquisition better positions us to help build
a resilient infrastructure, manage a complex heterogeneous
environment, and reduce overall information technology risk. In
addition, bringing the market leading capabilities of Symantec
and VERITAS together improves our ability to continuously
optimize performance and help companies recover from disruptions
when they occur.
As a result of the acquisition, we issued approximately
483 million shares of Symantec common stock, net of
treasury stock retained, based on an exchange ratio of
1.1242 shares of Symantec common stock for
33
each outstanding share of VERITAS common stock as of
July 2, 2005. In addition, we assumed outstanding VERITAS
options and RSUs and converted them into options to
purchase 66 million shares of Symantec common stock
and 425,000 Symantec RSUs based on the same exchange ratio. The
common stock issued had a fair value of $12 billion and was
valued using the average closing price of our common stock of
$25.87 over a range of trading days (December 14, 2004
through December 20, 2004, inclusive) around the
announcement date (December 16, 2004) of the transaction.
Under the terms of the agreement, we assumed each outstanding
option to purchase VERITAS common stock with an exercise price
equal to or less than $49.00, as well as each additional option
required to be assumed by applicable law. All other options to
purchase shares of VERITAS common stock not exercised prior to
the acquisition were cancelled immediately prior to the
acquisition and were not converted or assumed by Symantec. In
addition, we exchanged 425,000 RSUs for all of the VERITAS
outstanding RSUs. The assumed options and RSUs had a fair value
of $699 million.
In connection with the acquisition, we have recorded
$9 billion of goodwill, $1 billion of acquired product
rights, and $2 billion of other intangible assets from
acquisitions, deferred compensation of $63 million and net
tangible assets of $2 billion. In addition, we wrote off
acquired in-process research and development, or IPR&D, of
$284 million because the acquired technologies had not
reached technological feasibility and had no alternative uses.
We also incurred acquisition related expenses of
$40 million, which consisted of $32 million for legal
and other professional fees and $8 million of restructuring
costs for severance, associated benefits, outplacement services,
and excess facilities. The acquisition is structured to qualify
as a tax-free reorganization and we will account for the
acquisition using the purchase method of accounting. The results
of VERITAS operations have been included in our results of
operations beginning on July 2, 2005, and had a significant
impact on our revenues, cost of revenues, and operating expenses
for the September 2005 quarter.
In connection with the acquisition of VERITAS, we assumed
VERITAS contractual obligations related to its deferred
revenue. VERITAS deferred revenue was derived from
licenses, maintenance, consulting, education, and other
services. We estimated our obligation related to the
VERITAS deferred revenue using the cost
build-up approach. The
cost build-up approach
determines fair value by estimating the costs relating to
fulfilling the obligation plus a normal profit margin. The sum
of the costs and operating profit approximates, in theory, the
amount that we would be required to pay a third party to assume
the support obligation. The estimated costs to fulfill the
support obligation were based on the historical direct costs
related to providing the support. As a result, we recorded an
adjustment to reduce the carrying value of deferred revenue by
$359 million to $173 million, which represents our
estimate of the fair value of the contractual obligations
assumed.
Our operating segments are significant strategic business units
that offer different products and services, distinguished by
customer needs. We have six operating segments:
|
|
|
|
|
Consumer Products. Our Consumer Products segment
focuses on delivering our Internet security and problem-solving
products to individual users, home offices, and small businesses. |
|
|
|
Enterprise Security. Our Enterprise Security
segment provides security solutions for all tiers of a network:
at the server tier behind the gateway and at the client tier,
including desktop personal computers, or PCs, laptops, and
handhelds. |
|
|
|
Data Protection. Our Data Protection segment
provides software products designed to protect, backup, archive,
and restore data across a broad range of computing environments
from large corporate data centers to remote groups and PC
clients, such as desktop and laptop computers. |
|
|
|
Storage and Server Management. Our Storage and
Server Management segment offers products for optimizing storage
resource utilization, simplifying administration of
heterogeneous storage and server environments, and providing
continuous availability of mission-critical applications and
data. |
|
|
|
Services. Our Services segment provides a full
range of consulting and educational services to assist our
customers in assessing, architecting, implementing, supporting,
and maintaining their security, storage, and infrastructure
software solutions. |
34
|
|
|
|
|
Other. Our 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 acquired product
rights, other intangible assets, and other assets, and charges,
such as acquired in-process research and development, patent
settlement, amortization of deferred compensation, and
restructuring, that are not charged to the other operating
segments. |
During the quarter ended September 2005, we renamed the
Enterprise Administration segment as the Storage and Server
Management segment and added the Data Protection segment. During
the quarter ended June 2005, we moved Managed Security Services
from the Services segment to the Enterprise Security segment and
moved the services-related revenue from the Storage and Server
Management segment to the Services segment. Net revenues for the
three and six months ended September 30, 2004 have been
reclassified to conform to our current presentation.
Specifically, we reclassified $7 million and
$14 million of Managed Security Services revenue from the
Services segment to the Enterprise Security segment, and
$1 million and $3 million of services-related revenue
from the Storage and Server Management segment to the Services
segment during the three and six months ended September 30,
2004, respectively.
Our net loss was $251 million for the three months ended
September 30, 2005, as compared to net income of
$136 million for the three months ended September 30,
2004 and our net loss was $53 million for the six months
ended September 30, 2005, as compared to net income of
$253 million for the six months ended September 30,
2004. The decreased profitability is primarily due to the
write-off of acquired IPR&D totaling $284 million
during the September 2005 quarter as a result of the VERITAS
acquisition, in addition to other merger-related acquisition and
restructuring charges. In addition, we experienced an increase
in operating expenses primarily attributable to the VERITAS
acquisition, and specifically an increase in employee headcount
and related compensation. As of September 30, 2005,
employee headcount increased by approximately 148% from the
September 2004 quarter end. Of this increase, approximately 86%
was due to the VERITAS acquisition.
The three and six-month periods ended September 30, 2005
delivered global revenue growth across all of our operating
segments and geographic regions, as compared to the comparable
periods last year. The overall growth is primarily due to the
VERITAS acquisition and partly attributable to the continued
increase in system vulnerabilities to Internet attacks and
malicious code activity coupled with a growing level of
awareness of these threats around the world. Foreign currency
exchange rate fluctuations did not have a material impact on our
international revenue growth during the three and six-month
periods ended September 30, 2005. We are unable to predict
the extent to which revenues in future periods will be impacted
by changes in foreign currency rates. If international sales
become a greater portion of our total sales in the future,
changes in foreign exchange rates may have a potentially greater
impact on our revenues and operating results.
Critical Accounting Estimates
The preparation of our consolidated financial statements and
related notes in accordance with generally accepted accounting
principles requires us to make estimates, which include
judgments and assumptions, that affect the reported amounts of
assets, liabilities, revenue, and expenses, and related
disclosure of contingent assets and liabilities. We have based
our estimates on historical experience and on various
assumptions that are believed to be reasonable under the
circumstances and we evaluate our estimates on a regular basis
and make changes accordingly. Historically, our estimates
relative to our critical accounting estimates have not differed
materially from actual results; however, actual results may
differ from these estimates under different conditions. If
actual results differ from these estimates and other
considerations used in estimating amounts reflected in our
consolidated financial statements, the resulting changes could
have a material adverse effect on our consolidated statement of
operations, and in certain situations, could have a material
adverse effect on liquidity and our financial condition.
35
A critical accounting estimate is based on judgments and
assumptions about matters that are highly uncertain at the time
the estimate is made. Different estimates that reasonably could
have been used or changes in accounting estimates could
materially impact the financial statements. We believe that the
estimates described below represent our critical accounting
estimates, as they have the greatest potential impact on our
consolidated financial statements. We also refer you to our
summary of Significant Accounting Policies beginning
on page 8 in this report.
We recognize revenue in accordance with generally accepted
accounting principles that have been prescribed for the software
industry. Revenue recognition requirements in the software
industry are very complex and require us to make many estimates.
We expect our distributors and resellers to maintain adequate
inventory to meet future customer demand, which is generally
four to six weeks of customer demand based on recent buying
trends. We ship product to our distributors and resellers at
their request and based on their valid purchase orders. Our
distributors and resellers base the quantity of their orders on
their estimates to meet future customer demand, which may exceed
our expected level of a four to six week supply. We offer
limited rights of return if the inventory held by our
distributors and resellers is below the expected level of a four
to six week supply. We estimate future returns under these
limited rights of return in accordance with Statement of
Financial Accounting Standards, or SFAS, No. 48, Revenue
Recognition When Right of Return Exists. We typically offer
liberal rights of return if inventory held by our distributors
and resellers exceeds the expected level. Because we cannot
reasonably estimate the amount of excess inventory that will be
returned, we do not recognize revenue or record accounts
receivable for the amount in excess of the expected inventory
levels. On the same basis, we reduce the associated cost of
revenues, which is primarily related to materials, and include
this amount in inventory. We recognize these revenues and the
associated cost of revenues when the liberal rights of return
expire, which is when the inventory levels no longer exceed the
generally expected level of a four to six week supply. If we
made different estimates, material differences may result in the
amount and timing of our net revenues and cost of revenues for
any period presented. For the three months ended
September 30, 2005, expected inventory levels were two to
three weeks for certain products impacted by new releases.
In arrangements that include multiple elements, including
perpetual software licenses and maintenance and/or services, and
packaged products with content updates, we allocate and defer
revenue for the undelivered items based on VSOE of fair value of
the undelivered elements, and recognize the difference between
the total arrangement fee and the amount deferred for the
undelivered items as revenue. Our deferred revenue consists
primarily of the unamortized balance of enterprise product
maintenance and consumer product content updates and totaled
approximately $2 billion as of September 30, 2005, of
which $133 million was represented as Long-term deferred
revenue on the Condensed Consolidated Balance Sheet. VSOE of
each element is based on the price for which the undelivered
element is sold separately. We determine fair value of the
undelivered elements based on historical evidence of our
stand-alone sales of these elements to third parties. When VSOE
does not exist for undelivered items such as maintenance, then
the entire arrangement fee is recognized ratably over the
performance period. Changes to the elements in a software
arrangement, the ability to identify VSOE for those elements,
the fair value of the respective elements, and changes to a
products estimated life cycle could materially impact the
amount of earned and unearned revenue.
|
|
|
Reserves for Product Returns |
End-users may return our products, primarily within our Consumer
Products and Storage and Server Management segments, through
distributors and resellers or to us directly for a full refund
within a reasonably short period from the date of purchase. Our
estimated reserves for such end-user product returns, which are
recorded as an offset to revenue, are based primarily on
historical trends. We fully reserve for obsolete products in the
distribution channels as an offset to revenue. If we made
different estimates, material differences may result in the
amount and timing of our net revenues for any period presented.
More or less product may be returned than what was estimated
and/or the amount of inventory in the channel could be
36
different than what was estimated. These factors and
unanticipated changes in the economic and industry environment
could make our return estimates differ from actual results.
We estimate and record reserves as an offset to revenue for
channel and end-user rebates, related primarily to products
within our Consumer Products, Enterprise Security, and Storage
and Server Management segments. Our estimated reserves for
channel volume incentive rebates are based on distributors
and resellers actual performance against the terms and
conditions of volume incentive rebate programs, which are
typically entered into quarterly. Our reserves for end-user
rebates are estimated based on the terms and conditions of the
promotional programs, actual sales during the promotion, amount
of actual redemptions received, historical redemption trends by
product and by type of promotional program, and the value of the
rebate. We also consider current market conditions and economic
trends when estimating our reserves for rebates. If we made
different estimates, material differences may result in the
amount and timing of our net revenues for any period presented.
When we acquire businesses, we allocate the purchase price to
tangible assets and liabilities and identifiable intangible
assets acquired. Any residual purchase price is recorded as
goodwill. The allocation of the purchase price requires
management to make significant estimates in determining the fair
values of assets acquired and liabilities assumed, especially
with respect to intangible assets. These estimates are based on
historical experience and information obtained from the
management of the acquired companies. These estimates can
include, but are not limited to, the cash flows that an asset is
expected to generate in the future, the appropriate weighted
average cost of capital, and the cost savings expected to be
derived from acquiring an asset. These estimates are inherently
uncertain and unpredictable. In addition, unanticipated events
and circumstances may occur which may affect the accuracy or
validity of such estimates.
At September 30, 2005, goodwill was $10 billion,
acquired product rights were $1 billion, and other
identifiable intangible assets were $1 billion. We assess
the impairment of goodwill within our reporting units annually,
or more often if events or changes in circumstances indicate
that the carrying value may not be recoverable. We assess the
impairment of acquired product rights and other identifiable
intangible assets whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. An
impairment loss would be recognized when the sum of the future
undiscounted net cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying
amount. Such impairment loss would be measured as the difference
between the carrying amount of the asset and its fair value. The
estimate of cash flow is based upon, among other things, certain
assumptions about expected future operating performance and an
appropriate discount rate determined by our management. Our
estimates of undiscounted cash flows may differ from actual cash
flows due to, among other things, economic conditions, changes
to the business model, or changes in operating performance. If
we made different estimates, material differences may result in
write-downs of net long-lived and intangible assets, which would
be reflected by charges to our operating results for any period
presented.
|
|
|
Accounting for Excess Facilities |
We have estimated expenses for excess facilities related to
consolidating, moving, and relocating various groups or sites as
a result of restructuring activities and business acquisitions.
In determining our estimates, we obtained information from third
party leasing agents to calculate anticipated third party
sublease income and the vacancy period prior to finding a
sub-lessee. Market conditions will affect our ability to
sublease facilities on terms consistent with our estimates. Our
ability to sublease facilities on schedule or to negotiate lease
terms resulting in higher or lower sublease income than
estimated will affect our accrual for site closures. Differences
between estimates of related broker commissions, tenant
improvements, and related exit costs may increase or decrease
our accrual upon final negotiation. If we made different
estimates regarding these various components of our excess
facilities costs, the amount recorded for any period presented
could vary materially from those actually recorded.
37
We are required to estimate our income taxes in each federal,
state, and international jurisdiction in which we operate. This
process requires that we estimate the current tax exposure as
well as assess temporary differences between the accounting and
tax treatment of assets and liabilities, including items such as
accruals and allowances not currently deductible for tax
purposes. The income tax effects of the differences we identify
are classified as current or long-term deferred tax assets and
liabilities in our Condensed Consolidated Balance Sheet. Our
judgments, assumptions, and estimates relative to the current
provision for income tax take into account current tax laws, our
interpretation of current tax laws, and possible outcomes of
current and future audits conducted by foreign and domestic tax
authorities. Changes in tax laws or our interpretation of tax
laws and the resolution of current and future tax audits could
significantly impact the amounts provided for income taxes in
our Condensed Consolidated Balance Sheet and Condensed
Consolidated Statements of Operations. We must also assess the
likelihood that deferred tax assets will be realized from future
taxable income and, based on this assessment, establish a
valuation allowance, if required. Our determination of our
valuation allowance is based upon a number of assumptions,
judgments, and estimates, including forecasted earnings, future
taxable income, and the relative proportions of revenue and
income before taxes in the various domestic and international
jurisdictions in which we operate. To the extent we establish a
valuation allowance or change the valuation allowance in a
period, we reflect the change with a corresponding increase or
decrease to our tax provision in our Condensed Consolidated
Statements of Operations.
From time to time, we are involved in disputes that arise in the
ordinary course of business, and we do not expect this trend to
change in the future. We are currently involved in legal
proceedings as discussed in Note 11 of the Notes to
Condensed Consolidated Financial Statements.
When the likelihood of the incurrence of costs related to our
legal proceedings is probable and management has the ability to
estimate such costs, we provide for estimates of external legal
fees and any probable losses through charges to our Consolidated
Statements of Operations. These estimates have been based on our
assessment of the facts and circumstances at each balance sheet
date and are subject to change based upon new information and
intervening events.
Prior to our acquisition of VERITAS, VERITAS had been in
discussions with the staff of the SEC regarding the SECs
review of certain matters, as set forth in Note 11 of the
Notes to Condensed Consolidated Financial Statements. Based on
communications with the staff, we expect these discussions to
result in a settlement with the SEC in which we would be
required to pay a $30 million penalty. As part of our
accounting for the acquisition of VERITAS, we recorded an
accrual related to this matter of $30 million in Other
current liabilities on our Condensed Consolidated Balance Sheet.
In addition, we are involved in other pending legal matters, for
which our accrual for legal contingencies represented
insignificant amounts related to external legal fees. However,
even if we are successful in our pending legal matters,
estimated costs for external legal fees could be more than
anticipated. In addition, if we are unsuccessful, we could be
forced to pay significant damages and licensing fees for which
we have not accrued any amounts for loss contingencies, or to
modify our business practices. Any such results could materially
harm our business and could result in a material adverse impact
on our financial position, results of operations, or cash flows.
38
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30 | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Net revenues
|
|
$ |
1,055,864 |
|
|
$ |
618,313 |
|
|
$ |
1,755,806 |
|
|
$ |
1,174,947 |
|
Period over period increase
|
|
$ |
437,551 |
|
|
|
|
|
|
$ |
580,859 |
|
|
|
|
|
|
|
|
71 |
% |
|
|
|
|
|
|
49 |
% |
|
|
|
|
Net revenues increased during the three and six-month periods
ended September 30, 2005 as compared to the comparable
periods last year due primarily to sales of products acquired
through the VERITAS acquisition, which contributed
$378 million of net revenues during each period. In
addition, increases of $31 million and $110 million in
sales of our consumer products and increases of $26 million
and $80 million in sales of our enterprise security
products during the three and six-month periods ended
September 30, 2005 and 2004, respectively, as compared to
the same periods in 2004, contributed to the increase in net
revenues. The increased sales of these products were due
primarily to continuing growth in demand for our consumer
security protection products and our enterprise virus protection
solutions, as described further in the segment discussions that
follow.
|
|
|
Content, Subscriptions, and Maintenance Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
|
|
(As restated) | |
Content, subscriptions, and maintenance revenue
|
|
$ |
717,155 |
|
|
$ |
466,339 |
|
|
$ |
1,286,009 |
|
|
$ |
877,196 |
|
Percentage of total net revenues
|
|
|
68 |
% |
|
|
75 |
% |
|
|
73 |
% |
|
|
75 |
% |
Period over period increase
|
|
$ |
250,816 |
|
|
|
|
|
|
$ |
408,813 |
|
|
|
|
|
|
|
|
54 |
% |
|
|
|
|
|
|
47 |
% |
|
|
|
|
Content, subscriptions and maintenance revenue includes
arrangements for software maintenance and technical support for
our products, content and subscription services primarily
related to our security products, revenue from arrangements
where VSOE of the fair value of undelivered elements does not
exist, and managed security services. These arrangements are
generally offered to our customers over a specified period of
time and we recognize the related revenue ratably over the
maintenance, subscription or service period.
Content, subscriptions and maintenance revenue also includes
professional services revenue, which consists primarily of the
fees we earn related to consulting, education, and training
services. We generally recognize revenue from professional
services as the services are performed or upon written
acceptance from customers, if applicable, assuming all other
conditions for revenue recognition noted above have been met.
Content, subscriptions, and maintenance revenue increased during
the three and six-month periods ended September 30, 2005,
as compared to the comparable periods last year due primarily to
sales of products acquired through the VERITAS acquisition,
which contributed $142 million of net revenues during each
of the periods. In addition, during the three and six-month
periods ended September 30, 2005, we experienced increased
revenue related to our consumer security products of
$67 million and $165 million, respectively, and
increased revenue related to our enterprise security products of
$33 million and $84 million, respectively, primarily
due to increased awareness of information security threats.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
|
|
(As restated) | |
License revenue
|
|
$ |
338,709 |
|
|
$ |
151,974 |
|
|
$ |
469,797 |
|
|
$ |
297,751 |
|
|
Percentage of total net revenues
|
|
|
32 |
% |
|
|
25 |
% |
|
|
27 |
% |
|
|
25 |
% |
Period over period increase
|
|
$ |
186,735 |
|
|
|
|
|
|
$ |
172,046 |
|
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
58 |
% |
|
|
|
|
|
|
* |
Percentage not meaningful |
We market and distribute our software products both as
standalone software products and as integrated product suites.
License revenue is derived primarily from our various products
and technology. License revenue increased during the three and
six-month periods ended September 30, 2005 as compared to
the comparable periods last year due primarily to sales of
products acquired through the VERITAS acquisition, which
contributed $235 million of net revenues during each of the
periods. This increase was partially offset by a decrease in
sales of our consumer security products of $36 million and
$55 million during the three and six-month periods ended
September 30, 2005, respectively, as compared to the
comparable periods last year primarily due to the late release
of our 2006 consumer products during the quarter, competitive
pressures and a lack of recent high profile information security
threat activity. To a lesser extent, the increase was offset by
a decrease in sales of our enterprise security products due to
weakness across the middle to high end security markets.
|
|
|
Net Revenues from our Consumer Products Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Consumer Products revenues
|
|
$ |
346,199 |
|
|
$ |
315,307 |
|
|
$ |
703,153 |
|
|
$ |
593,619 |
|
Percentage of total net revenues
|
|
|
33 |
% |
|
|
51 |
% |
|
|
40 |
% |
|
|
51 |
% |
Period over period increase
|
|
$ |
30,892 |
|
|
|
|
|
|
$ |
109,534 |
|
|
|
|
|
|
|
|
10 |
% |
|
|
|
|
|
|
18 |
% |
|
|
|
|
We believe that a significant portion of the increase in
revenues from our Consumer Products segment during the three and
six-month periods ended September 30, 2005 as compared to
the comparable periods last year was attributable to a growing
level of awareness of information security threats around the
world. The increase in our Consumer Products revenue was due
primarily to increased sales of our Norton Internet Security
products of $38 million and $90 million, which
consisted of higher product content update subscriptions
revenue, partially offset by lower license revenue, and of our
Norton System Works products of $9 million and
$22 million during the three and six-month periods ended
September 30, 2005, respectively, as compared to the
comparable periods last year. The majority of this increase in
revenue was booked through our electronic distribution channel
that includes original equipment manufacturer, or OEM,
subscriptions, upgrades, online sales, and renewals. The
increase during the three-month period ended September 30,
2005 was offset by a decrease in sales of our Norton AntiVirus
products as we continue to focus on migrating our customers to
the Norton Internet Security products, which offer broader
protection to address the rapidly changing threat environment.
During the three months ended September 30, 2005 we
experienced a delay in the release of our 2006 consumer
products, which resulted in lower than expected revenue for
consumer products for the quarter and a higher level of
unfulfilled license orders for these products at the end of the
quarter.
40
|
|
|
Net Revenues from our Enterprise Security Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Enterprise Security revenues
|
|
$ |
259,257 |
|
|
$ |
232,932 |
|
|
$ |
525,349 |
|
|
$ |
444,873 |
|
Percentage of total net revenues
|
|
|
25 |
% |
|
|
38 |
% |
|
|
30 |
% |
|
|
38 |
% |
Period over period increase
|
|
$ |
26,325 |
|
|
|
|
|
|
$ |
80,476 |
|
|
|
|
|
|
|
|
11 |
% |
|
|
|
|
|
|
18 |
% |
|
|
|
|
The increase in our Enterprise Security revenue was due to
increased growth from our anti spam products offset by lower
growth from our Enterprise AntiVirus products. Specifically, the
increase in our Enterprise Security revenue was due primarily to
an increase of $10 million and $35 million in sales of
our Enterprise AntiVirus products, and an increase of
$14 million and $31 million in sales of our anti spam
products during the three and six-month periods ended
September 30, 2005, respectively, as compared to the
comparable periods last year.
|
|
|
Net Revenues from our Data Protection Segment |
The Data Protection segment is comprised of products acquired
through the VERITAS acquisition. Revenue from our Data
Protection segment was $209 million and was comprised
primarily of revenue related to Backup Exec products and
NetBackup products of $103 million and $91 million
during each of the three and six-month periods ended
September 30, 2005, respectively.
|
|
|
Net Revenues from our Storage and Server Management
Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Storage and Server Management revenues
|
|
$ |
201,991 |
|
|
$ |
64,629 |
|
|
$ |
269,044 |
|
|
$ |
125,890 |
|
Percentage of total net revenues
|
|
|
19 |
% |
|
|
10 |
% |
|
|
15 |
% |
|
|
11 |
% |
Period over period increase
|
|
$ |
137,362 |
|
|
|
|
|
|
$ |
143,154 |
|
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
* |
Percentage not meaningful |
The increase in revenues from our Storage and Server Management
segment was due primarily to sales of products acquired through
the VERITAS acquisition, which contributed $139 million of
net revenues during each of the three and six-month periods
ended September 30, 2005. This amount was offset slightly
by the continued decline in sales of our PcAnywhere product.
|
|
|
Net Revenues from our Services Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Services revenues
|
|
$ |
40,408 |
|
|
$ |
5,276 |
|
|
$ |
50,105 |
|
|
$ |
10,526 |
|
Percentage of total net revenues
|
|
|
4 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
|
1 |
% |
Period over period increase
|
|
$ |
35,132 |
|
|
|
|
|
|
$ |
39,579 |
|
|
|
|
|
% increase
|
|
|
* |
|
|
|
|
|
|
|
* |
|
|
|
|
|
41
|
|
* |
Percentage not meaningful |
The increase in revenue from our Services segment during the
three and six-month periods ended September 30, 2005 as
compared to the comparable periods last year was primarily due
to services related to the VERITAS acquisition, which
contributed $29 million during each of the periods. In
addition, the increase was due to an increase in our security
consulting services of $7 million and $12 million
during the three and six-month periods ended September 30,
2005, respectively, as compared to the comparable periods last
year. We expect that our services revenue will continue to
increase in the future.
|
|
|
Net Revenues from our Other Segment |
Revenues from our Other segment during the three and six-month
periods ended September 30, 2005 and 2004 were
insignificant.
|
|
|
Net Revenues by Geographic Region |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
North America (U.S. and Canada)
|
|
$ |
558,386 |
|
|
$ |
321,043 |
|
|
$ |
931,875 |
|
|
$ |
619,262 |
|
Percentage of total net revenues
|
|
|
53 |
% |
|
|
52 |
% |
|
|
53 |
% |
|
|
53 |
% |
Period over period increase
|
|
$ |
237,343 |
|
|
|
|
|
|
$ |
312,613 |
|
|
|
|
|
% increase
|
|
|
74 |
% |
|
|
|
|
|
|
50 |
% |
|
|
|
|
EMEA (Europe, Middle East, Africa)
|
|
$ |
329,351 |
|
|
$ |
201,046 |
|
|
$ |
547,561 |
|
|
$ |
370,867 |
|
Percentage of total net revenues
|
|
|
31 |
% |
|
|
32 |
% |
|
|
31 |
% |
|
|
32 |
% |
Period over period increase
|
|
$ |
128,305 |
|
|
|
|
|
|
$ |
176,694 |
|
|
|
|
|
% increase
|
|
|
64 |
% |
|
|
|
|
|
|
48 |
% |
|
|
|
|
Asia Pacific
|
|
$ |
74,396 |
|
|
$ |
34,672 |
|
|
$ |
113,548 |
|
|
$ |
65,093 |
|
Percentage of total net revenues
|
|
|
7 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
5 |
% |
Period over period increase
|
|
$ |
39,724 |
|
|
|
|
|
|
$ |
48,455 |
|
|
|
|
|
% increase
|
|
|
* |
|
|
|
|
|
|
|
74 |
% |
|
|
|
|
Japan
|
|
$ |
75,525 |
|
|
$ |
50,957 |
|
|
$ |
132,272 |
|
|
$ |
99,404 |
|
Percentage of total net revenues
|
|
|
7 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
Period over period increase
|
|
$ |
24,568 |
|
|
|
|
|
|
$ |
32,868 |
|
|
|
|
|
% increase
|
|
|
48 |
% |
|
|
|
|
|
|
33 |
% |
|
|
|
|
Latin America
|
|
$ |
18,206 |
|
|
$ |
10,595 |
|
|
$ |
30,550 |
|
|
$ |
20,321 |
|
Percentage of total net revenues
|
|
|
2 |
% |
|
|
2 |
% |
|
|
2 |
% |
|
|
2 |
% |
Period over period increase
|
|
$ |
7,611 |
|
|
|
|
|
|
$ |
10,229 |
|
|
|
|
|
% increase
|
|
|
72 |
% |
|
|
|
|
|
|
50 |
% |
|
|
|
|
|
|
* |
Percentage not meaningful |
The increase in net revenues in international regions during the
three and six-month periods ended September 30, 2005 as
compared to the comparable periods last year was primarily due
to sales of products acquired through the VERITAS acquisition,
which contributed $183 million of international net
revenues during each of the periods, and to a lesser extent, to
increased sales of our Norton Internet Security products in our
Consumer Products segment and our antivirus products in our
Enterprise Security segment in those regions. We believe this
increase in sales of our Norton Internet Security products is
attributable to increased customer awareness related to
information security threats. Foreign currency exchange rate
fluctuations did not have a material impact on our international
revenue growth during the three and six-month periods ended
September 30, 2005. We are unable to predict the extent to
which revenues in future periods will be impacted by changes in
foreign currency rates. If international sales become a greater
portion of our total sales in the
42
future, changes in foreign exchange rates may have a potentially
greater impact on our revenues and operating results.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Cost of Revenue
|
|
$ |
313,442 |
|
|
$ |
109,219 |
|
|
$ |
430,237 |
|
|
$ |
209,480 |
|
Gross margin
|
|
|
70 |
% |
|
|
82 |
% |
|
|
75 |
% |
|
|
82 |
% |
Period over period increase
|
|
$ |
204,223 |
|
|
|
|
|
|
$ |
220,757 |
|
|
|
|
|
% increase
|
|
|
* |
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
* |
Percentage not meaningful |
Gross profit represents net revenues less cost of revenues. Cost
of revenues consist primarily of payments to OEMs under revenue
sharing arrangements, costs for producing manuals and CDs,
fee-based technical support costs, costs of services, royalties
paid to third parties under technology licensing agreements,
packaging costs, manufacturing expenses, and amortization of
acquired product rights from business acquisitions.
Gross margin decreased during the three and six-month periods
ended September 30, 2005 as compared to the comparable
periods last year due primarily to increased amortization of
acquired product rights as a result of certain identifiable
intangibles acquired through the VERITAS acquisition. Costs for
services and technical support also increased during the three
and six-month periods ended September 30, 2005 as compared
to the comparable periods last year.
|
|
|
Cost of Content, Subscriptions, and Maintenance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Cost of content, subscriptions, and maintenance
|
|
$ |
173,347 |
|
|
$ |
83,492 |
|
|
$ |
272,027 |
|
|
$ |
159,781 |
|
As a % of related revenue
|
|
|
24 |
% |
|
|
19 |
% |
|
|
21 |
% |
|
|
20 |
% |
Period over period increase
|
|
$ |
89,855 |
|
|
|
|
|
|
$ |
112,246 |
|
|
|
|
|
% increase
|
|
|
* |
|
|
|
|
|
|
|
70 |
% |
|
|
|
|
|
|
* |
Percentage not meaningful |
Cost of content, subscriptions, and maintenance consists
primarily of royalty expense, technical support costs, and
distribution costs. Cost of content, subscriptions and
maintenance increased as a percentage of the related revenue
during the three and six-month periods ended September 30,
2005, due primarily to sales of products acquired through the
VERITAS acquisition, which contributed $73 million in
additional cost of content, subscriptions, and maintenance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Cost of licenses
|
|
$ |
10,623 |
|
|
$ |
12,523 |
|
|
$ |
17,725 |
|
|
$ |
25,245 |
|
As a % of related revenue
|
|
|
3 |
% |
|
|
7 |
% |
|
|
4 |
% |
|
|
7 |
% |
Period over period decrease
|
|
$ |
(1,900 |
) |
|
|
|
|
|
$ |
(7,520 |
) |
|
|
|
|
% decrease
|
|
|
(15 |
)% |
|
|
|
|
|
|
(30 |
)% |
|
|
|
|
43
|
|
* |
Percentage not meaningful |
Cost of licenses consists primarily of distribution costs and
royalty expenses. Cost of licenses decreased as a percentage of
the related revenue during the three and six-month periods ended
September 30, 2005, as compared to the comparable periods
last year, due primarily to a decrease in distribution costs
resulting from a decrease in sales of consumer products, which
was partially offset by an increase in cost of licenses from
sales of products acquired through the VERITAS acquisition.
|
|
|
Amortization of Acquired Product Rights |
Amortization of acquired product rights is included in Cost of
revenues in the Condensed Consolidated Statements of Operations.
Acquired product rights are comprised of developed technologies,
patents, and revenue-related order backlog and contracts from
acquired companies. Amortization of acquired product rights was
$129 million and $140 million during the three and
six-month periods ended September 30, 2005, respectively,
as compared to $13 million and $24 million during the
comparable 2004 periods. The increased amortization is primarily
associated with the VERITAS acquisition, for which amortization
began in July 2005. In connection with the VERITAS acquisition,
we recorded $1 billion in acquired product rights which
will be amortized over their useful lives of three months to
five years. For further discussion of acquired product rights
and related amortization, see Notes 5 and 6 of the Notes to
Condensed Consolidated Financial Statements.
Operating Expenses
|
|
|
Sales and Marketing Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Sales and marketing
|
|
$ |
401,674 |
|
|
$ |
201,886 |
|
|
$ |
612,783 |
|
|
$ |
389,818 |
|
Percentage of total net revenues
|
|
|
38 |
% |
|
|
33 |
% |
|
|
35 |
% |
|
|
33 |
% |
Period over period increase
|
|
$ |
199,788 |
|
|
|
|
|
|
$ |
225,965 |
|
|
|
|
|
% increase
|
|
|
99 |
% |
|
|
|
|
|
|
57 |
% |
|
|
|
|
The increase in sales and marketing expenses during the three
and six-month periods ended September 30, 2005 as compared
to the comparable periods last year was due primarily to the
VERITAS acquisition, which contributed $188 million in
additional sales and marketing expenses during each of the
periods. The remaining increase in sales and marketing expenses
was due primarily to an increase in employee headcount from
company growth, resulting in additional employee compensation
cost.
|
|
|
Research and Development Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Research and development
|
|
$ |
187,313 |
|
|
$ |
83,816 |
|
|
$ |
278,546 |
|
|
$ |
156,700 |
|
Percentage of total net revenues
|
|
|
18 |
% |
|
|
14 |
% |
|
|
16 |
% |
|
|
13 |
% |
Period over period increase
|
|
$ |
103,497 |
|
|
|
|
|
|
$ |
121,846 |
|
|
|
|
|
% increase
|
|
|
* |
|
|
|
|
|
|
|
78 |
% |
|
|
|
|
|
|
* |
Percentage not meaningful |
The increase in research and development expenses during the
three and six-month periods ended September 30, 2005 as
compared to the comparable periods last year was due primarily
to the VERITAS acquisition, which contributed $104 million
in additional research and development expenses during each of
the periods.
44
|
|
|
General and Administrative Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
General and administrative
|
|
$ |
59,379 |
|
|
$ |
27,578 |
|
|
$ |
89,767 |
|
|
$ |
51,863 |
|
Percentage of total net revenues
|
|
|
6 |
% |
|
|
4 |
% |
|
|
5 |
% |
|
|
4 |
% |
Period over period increase
|
|
$ |
31,801 |
|
|
|
|
|
|
$ |
37,904 |
|
|
|
|
|
% increase
|
|
|
* |
|
|
|
|
|
|
|
73 |
% |
|
|
|
|
|
|
* |
Percentage not meaningful |
The increase in general and administrative expenses during the
three and six-month periods ended September 30, 2005 as
compared to the comparable periods last year was due primarily
to the VERITAS acquisition, which contributed $27 million
in additional general and administrative expenses during each of
the periods. The remaining increase in general and
administrative expenses was due primarily to an increase in
employee headcount from company growth, resulting in additional
employee compensation cost.
|
|
|
Amortization of Other Intangible Assets from
Acquisitions |
Other intangible assets from acquisitions are comprised of
customer base and trade names. Amortization of other intangible
assets was $48 million and $50 million during the
three and six-month periods ended September 30, 2005,
respectively, as compared to $1 million and $2 million
during the comparable 2004 periods. The increased amortization
is primarily associated with the VERITAS acquisition, for which
amortization began in July 2005. In connection with the VERITAS
acquisition, we recorded $2 billion in other intangible
assets which will be amortized over their useful lives of 8 to
10 years. For further discussion of other intangible assets
from acquisitions and related amortization, see Note 6 of
the Notes to Condensed Consolidated Financial Statements.
|
|
|
Amortization of Deferred Stock-based Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Sales and marketing
|
|
|
4,457 |
|
|
|
246 |
|
|
|
5,263 |
|
|
|
246 |
|
Research and development
|
|
|
6,763 |
|
|
|
337 |
|
|
|
7,868 |
|
|
|
337 |
|
General and administrative
|
|
|
2,169 |
|
|
|
56 |
|
|
|
3,043 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of deferred stock-based compensation
|
|
$ |
13,389 |
|
|
$ |
639 |
|
|
$ |
16,174 |
|
|
$ |
639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the acquisition of VERITAS in July 2005, we
assumed VERITAS stock options and RSUs and converted them into
options to purchase 66 million shares of Symantec
common stock and 425,000 Symantec RSUs. The fair value of the
assumed stock options was $688 million using the
Black-Scholes valuation model with the following weighted
average assumptions: volatility of 36%, risk-free interest rate
of 3.4%, expected life of 3.5 years, and dividend yield of
zero. The fair value of the RSUs was $11 million based on
the intrinsic value of the underlying shares on the announcement
date. The intrinsic value of the unvested options and RSUs was
valued at $63 million and was recorded in deferred
stock-based compensation within Stockholders equity in the
Condensed Consolidated Balance Sheets during the September 2005
quarter. We recorded amortization of deferred stock-based
compensation related to the assumed VERITAS stock options and
RSUs of $11 million during the three-month period ended
September 30, 2005.
In connection with the acquisition of Brightmail in June 2004,
we assumed Brightmail stock options and converted them into
options to purchase Symantec common stock. The intrinsic value
of the assumed unvested stock options was $21 million and
was recorded in deferred stock-based compensation within
45
Stockholders Equity in the Condensed Consolidated Balance
Sheet during fiscal 2005. We recorded amortization of deferred
stock-based compensation related to the assumed Brightmail stock
options of $2 million and $4 million during the three
and six-month periods ended September 30, 2005,
respectively.
On May 12, 2005, we resolved the Altiris patent litigation
matters with a cross-licensing agreement that resolved all legal
claims between the companies. As part of the settlement, we paid
Altiris $10 million for use of the disputed technology.
Under the transaction, we expensed $2 million of patent
settlement costs in the June 2005 quarter that was related to
benefits we received in and prior to the June 2005 quarter. The
remaining $8 million was capitalized and is being amortized
to Cost of revenues in the Condensed Consolidated Statements of
Operations over the remaining life of the primary patent, which
expires in May 2017.
|
|
|
Acquired In-process Research and Development
(IPR&D) |
During the three-month period ended September 30, 2005, we
wrote off $284 million of IPR&D in connection with our
acquisition of VERITAS, completed in July 2005. The IPR&D
was written off because the acquired technologies had not
reached technological feasibility and had no alternative uses.
At the time of the acquisition, VERITAS was developing new
products in multiple product areas that qualify as IPR&D.
These efforts included NetBackup 6.1, Backup Exec 11.0, Server
Management 5.0 and various other projects. Projects that qualify
as IPR&D represent those that have not yet reached
technological feasibility. Technological feasibility is defined
as being equivalent to completion of a beta-phase working
prototype in which there is no remaining risk relating to the
development. At the time of the acquisition, it was estimated
that these IPR&D development efforts would be completed over
the next 12 to 18 months at an estimated total cost of
$120 million. At September 30, 2005, the development
efforts were continuing on schedule with no significant
additional costs.
The value assigned to IPR&D was determined by considering
the importance of each project to the overall development plan,
estimating costs to develop the purchased IPR&D into
commercially viable products, estimating the resulting net cash
flows from the projects when completed, and discounting the net
cash flows to their present value. The revenue estimates used to
value the purchased IPR&D were based on estimates of
relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product
introductions by VERITAS and its competitors.
The rate utilized to discount the net cash flows to their
present value was based on VERITAS weighted average cost
of capital. The weighted average cost of capital was adjusted to
reflect the difficulties and uncertainties in completing each
project and thereby achieving technological feasibility, the
percentage of completion of each project, anticipated market
acceptance and penetration, market growth rates, and risks
related to the impact of potential changes in future target
markets. Based on these factors, a discount rate of 13.5% was
deemed appropriate for valuing the IPR&D.
The estimates used in valuing IPR&D were based upon
assumptions believed to be reasonable but which are inherently
uncertain and unpredictable. Assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances may occur.
During the six-month period ended September 2004 we wrote-off
$2 million of IPR&D in connection with our acquisition
of Brightmail, completed in June 2004. The Brightmail IPR&D
related to the third generation of Brightmails anti spam
product offering. The efforts required to develop the acquired
IPR&D principally related to the completion of all planning,
design, development, and testing activities that were necessary
to establish that the product could be produced to meet its
design specifications, including features, functions, and
performance. We determined the fair value of the acquired
IPR&D by estimating the projected cash flows related to the
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.
46
As of September 30, 2005, we had a restructuring reserve of
$54 million, of which $25 million was included in
Other accrued expenses in the Condensed Consolidated Balance
Sheet and $29 million was included in Other long-term
liabilities in the Condensed Consolidated Balance Sheet. The
restructuring reserve consists of $50 million related to a
restructuring reserve assumed from VERITAS in connection with
the acquisition, $2 million related to restructuring costs
as a result of the VERITAS acquisition, and $2 million
related to our fiscal 2002 restructuring plan.
In connection with the VERITAS acquisition, we assumed a
restructuring reserve for $53 million related to the 2002
VERITAS facility restructuring plan. During the quarter ended
September 30, 2005, we paid $3 million related to this
reserve. The remaining reserve amount of $50 million will
be paid over the remaining lease terms, ending at various dates
through 2022. The majority of costs are currently scheduled to
be paid by the year ending December 31, 2010.
The estimates related to the 2002 VERITAS restructuring reserve
may vary significantly depending, in part, on the commercial
real estate market in the applicable metropolitan areas, our
ability to obtain subleases related to these facilities and the
time period to do so, the sublease rental market rates and the
outcome of negotiations with lessors regarding terminations of
some of the leases. Some of these factors are beyond our
control. Adjustments to the 2002 VERITAS restructuring reserve
will be made if actual lease exit costs or sublease income
differ materially from amounts currently expected.
During the three months ended September 30, 2005, we
recorded $1 million of restructuring costs, as a result of
the VERITAS acquisition, which related to excess facilities
costs, severance, associated benefits, and outplacement
services. During the six months ended September 30, 2005,
we recorded $5 million of restructuring costs, of which
$1 million related to excess facilities costs and
$4 million related to severance, associated benefits, and
outplacement services. These restructuring costs reflect the
termination of redundant employees and the consolidation of
certain facilities as a result of the VERITAS acquisition.
During the three and six months ended September 30, 2005,
payments of $1 million and $3 million, respectively,
were made against the restructuring reserve. We expect the
remaining balance to be paid by the end of fiscal 2006.
The fiscal 2002 restructuring reserve consists of the costs of
excess facilities in Europe and Eugene, Oregon, net of sublease
income. During the three and six months ended September 30,
2005, no significant amounts were paid and we expect the
remaining reserve balance to be utilized by the end of fiscal
2007.
See Note 5 of the Notes to Condensed Consolidated Financial
Statements for information on the acquisition related costs
incurred in connection with the VERITAS acquisition.
In connection with our acquisition of VERITAS, we recorded
integration planning costs of $5 million and
$13 million during the three and six-month periods ended
September 30, 2005, respectively, which consisted primarily
of costs incurred for consulting services and other professional
fees.
|
|
|
Non-operating Income and Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Interest and other income, net
|
|
$ |
39,963 |
|
|
$ |
10,723 |
|
|
$ |
62,721 |
|
|
$ |
21,161 |
|
Interest expense
|
|
|
(7,503 |
) |
|
|
(5,291 |
) |
|
|
(7,503 |
) |
|
|
(10,582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
32,460 |
|
|
$ |
5,432 |
|
|
$ |
55,218 |
|
|
$ |
10,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net revenues
|
|
|
3 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
|
1 |
% |
Period over period increase
|
|
$ |
27,028 |
|
|
|
|
|
|
$ |
44,639 |
|
|
|
|
|
% increase
|
|
|
* |
|
|
|
|
|
|
|
* |
|
|
|
|
|
47
|
|
* |
Percentage not meaningful |
The increase in interest and other income, net during the three
and six-month periods ended September 30, 2005 as compared
to the comparable periods last year was due primarily to a
higher average investment balance, due to the cash acquired
through the VERITAS acquisition, and higher average interest
rates.
Interest expense during the three and six months ended
September 30, 2005 was due primarily to the interest and
accretion related to the 0.25% convertible subordinated
notes that were assumed in connection with the acquisition of
VERITAS. In August 2003, VERITAS issued $520 million of
0.25% convertible subordinated notes due August 1,
2013. For further discussion of the 0.25% convertible
subordinated notes, see Note 7 of the Notes to Condensed
Consolidated Financial Statements.
Interest expense during the three and six-month periods ended
September 2004 was related to the issuance of our
$600 million 3% convertible subordinated notes in
October 2001. In November 2004, substantially all of the
outstanding convertible subordinated notes were converted into
70 million shares of our common stock and the remainder was
redeemed for cash. We have not incurred further interest expense
with respect to these notes as a result of the conversion.
|
|
|
Provision for Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Provision for income taxes
|
|
$ |
25,441 |
|
|
$ |
61,926 |
|
|
$ |
81,884 |
|
|
$ |
117,054 |
|
Effective income tax rate
|
|
|
(11 |
)% |
|
|
31 |
% |
|
|
281 |
% |
|
|
32 |
% |
The effective tax rates for the three and six months ended
September 30, 2005 reflect the impact of the IPR&D
charge in the September 2005 quarter which is nondeductible for
tax reporting purposes. Excluding the charge for IPR&D, and
excluding a tax benefit attributable to a reversal of fiscal
2005 tax expense due to technical corrections to the American
Jobs Creation Act of 2004, the effective tax rate for the six
months ended September 30, 2005 is approximately 33%. This
rate represents our current estimated annual effective tax rate
and is lower than the U.S. Federal and state combined tax
rate due to a lower statutory tax rate on income generated by
our Irish operations.
The rate for the three and six months ended September 30,
2004 is lower than the U.S. Federal and state combined tax
rate due to a lower statutory tax rate on income generated by
our Irish operations.
Realization of our net deferred tax assets as of
September 30, 2005 is dependent primarily upon future
United States taxable income and our implementation of tax
planning strategies. We believe it is more likely than not that
the net deferred tax assets will be realized, based on
historical earnings and expected levels of future taxable income
as well as the implementation of tax planning strategies. Levels
of future taxable income are subject to the various risks and
uncertainties discussed in the Risk Factors set forth in this
report. An additional valuation allowance against net deferred
tax assets may be necessary if it is more likely than not that
all or a portion of the net deferred tax assets will not be
realized. We will assess the need for an additional valuation
allowance on a quarterly basis.
American Jobs Creation Act of 2004 Repatriation
of Foreign Earnings
During the March 2005 quarter, we repatriated $500 million
from certain of our foreign subsidiaries which qualified for the
85% dividends received deduction under the provisions of the
American Jobs Creation Act, or the Jobs Act, enacted in October
2004. We recorded a tax charge for this repatriation of
$54 million in the March 2005 quarter.
In May 2005, clarifying language was issued by the
U.S. Department of Treasury and the Internal Revenue
Service with respect to the treatment of foreign taxes paid on
the earnings repatriated under the Jobs Act. As a result of this
clarifying language, we reduced the tax expense attributable to
the repatriation by
48
approximately $20 million in the June 2005 quarter, which
reduced the cumulative tax charge on the repatriation to
$34 million. During the September 2005 quarter, additional
clarifying language was issued regarding the treatment of
certain deductions attributable to the earnings repatriation.
The result of this clarification was a further reduction of tax
expense of approximately $2 million during the September
2005 quarter, thus reducing the cumulative charge on the
repatriation to $32 million.
|
|
|
Liquidity and Capital Resources |
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
(As restated) | |
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
529,269 |
|
|
$ |
469,297 |
|
|
Investing activities
|
|
|
2,301,376 |
|
|
|
(696,078 |
) |
|
Financing activities
|
|
|
(2,091,012 |
) |
|
|
(28,683 |
) |
Effect of exchange rate fluctuations on cash and cash equivalents
|
|
|
(24,660 |
) |
|
|
4,876 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$ |
714,973 |
|
|
$ |
(250,588 |
) |
|
|
|
|
|
|
|
As of September 30, 2005, our principal source of liquidity
was our existing cash, cash equivalents, and short-term
investments of $4 billion, of which $2 billion was
held domestically.
On July 2, 2005, we completed our acquisition of VERITAS
and acquired its cash, cash equivalents, and short-term
investments of approximately $2.9 billion and assumed
contingently convertible debt with a principal amount of
$520 million due August 1, 2013 and a short-term loan
with a principal amount of EURO 411 million. The
convertible debt may be converted by the holders at any time
into 24.37288 shares of Symantec common stock per $1,000
principal amount, which is equivalent to a conversion price of
approximately $41.03 per share of Symantec common stock.
Upon conversion, we would be required to pay the holder the cash
value of the applicable number of shares of Symantec common
stock ($22.66 per share at September 30, 2005), up to
the principal amount of the note. Amounts in excess of the
principal amount, if any, may be paid in cash or in stock at
Symantecs option. Interest payments of 0.25% per
annum on the principal amount are payable semi-annually in
arrears on February 1 and August 1 of each year. On or
after August 5, 2006, we have the option to redeem all or a
portion of the notes at a redemption price equal to the
principal amount, plus accrued and unpaid interest. On
August 1, 2006 and August 1, 2008, or upon a
fundamental change involving Symantec, holders have the right to
require us to repurchase the notes at a repurchase price equal
to the principal amount, plus accrued and unpaid interest. The
entire balance of the short-term loan with a principal balance
of EURO 411 million was paid off on July 7, 2005.
On January 16, 2001, the Board of Directors approved a plan
to repurchase up to $700 million of Symantec common stock.
The plan had a repurchase limitation of 60 million shares,
and did not have an expiration date. In January 2004, the
Board increased the authorized amount for share repurchases by
$240 million without a repurchase limitation, and increased
that amount again by $300 million in October 2004. On
March 28, 2005, the Board increased the authorized amount
for share repurchases by $3 billion, effective upon
completion of our acquisition of VERITAS on July 2, 2005.
The repurchase plan does not include a repurchase limitation or
an expiration date. We commenced repurchases using the
$3 billion authorization on August 2, 2005 and
anticipate completing all repurchases under this authorization
by the end of November 2005. As of September 30, 2005,
approximately $2 billion remained authorized for stock
repurchases.
During the September 2005 quarter, we reduced our income taxes
payable liability by approximately $37 million due to a
favorable development in a Tax Court case involving the
allocation of the tax deductions from stock option compensation
to a foreign subsidiary. The majority of this liability release
was credited to capital in excess of par value as the underlying
tax benefits realized are attributable to stock option
compensation.
49
We believe that our cash balances, including those assumed by
the acquisition of VERITAS, as well as cash that we generate
over time from our combined operations, will be sufficient to
satisfy our anticipated cash needs for working capital and
capital expenditures for at least the next 12 months.
Net cash provided by operating activities during the six months
ended September 30, 2005 resulted largely from a net loss
of $53 million offset by non-cash depreciation and
amortization charges of $272 million and the write off of
IPR&D of $284 million related to the acquisition of
VERITAS. Operating cash also resulted from strong cash
collections reflected as a decrease in accounts receivable of
$110 million. These factors were partially offset by cash
payments related to taxes.
Net cash provided by operating activities during the six months
ended September 30, 2004 resulted largely from net income
of $253 million, plus non-cash depreciation and
amortization charges of $61 million and the income tax
benefit from employee stock plans of $60 million. In
addition, deferred revenue increased by $157 million,
offset by an increase in accounts receivable of $57 million.
Net cash provided by investing activities during the six months
ended September 30, 2005 was primarily the result of net
sales of short-term investments of $1 billion and cash
acquired through the acquisition of VERITAS, net of acquisition
costs of $1 billion. These amounts were offset by capital
expenditures of $82 million.
Net cash used in investing activities during the six months
ended September 30, 2004 was primarily the result of
$298 million of cash payments made in connection with the
acquisition of Brightmail and net purchases of short-term
investments of $327 million.
We have operated a stock repurchase program since 2001. On
March 28, 2005, the Board of Directors increased the dollar
amount of authorized stock repurchases by $3 billion, which
became effective upon completion of the VERITAS acquisition on
July 2, 2005. We commenced repurchases under the
$3 billion authorization on August 2, 2005 and
anticipate completing the repurchases by the end of November
2005.
During the six-month period ended September 30, 2005, we
repurchased 84 million shares at prices ranging from $18.33
to $22.51 per share for an aggregate amount of $2 billion.
Of this amount, $1.7 billion had been paid in cash by
September 30, 2005 and an additional $145 million
remained unpaid at September 30, 2005. The
$145 million was paid in October 2005. During the six-month
period ended September 30, 2004, we repurchased
5 million shares at prices ranging from $21.42 to $24.62
per share for an aggregate amount of $120 million. As of
September 30, 2005, approximately $2 billion remained
authorized for stock repurchases, without any specific limit on
the number of shares to be repurchased, based on the
$3 billion authorization described above and prior stock
repurchase authorizations.
In addition, during the six-month periods ended
September 30, 2005 and 2004, we received $81 million
and $91 million, respectively, from the sale of our common
stock through employee benefit plans.
50
Contractual Obligations and Off-Balance Sheet Arrangements
The contractual obligations presented in the table below
represent our estimates of future payments under fixed
contractual obligations and commitments. Changes in our business
needs, cancellation provisions, changing interest rates, and
other factors may result in actual payments differing from the
estimates. We cannot provide certainty regarding the timing and
amounts of payments. We have presented below a summary of the
most significant assumptions used in our information within the
context of our consolidated financial position, results of
operations, and cash flows. The following table summarizes our
fixed contractual obligations and commitments as of
September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due In | |
|
|
Total | |
|
| |
|
|
Payments | |
|
|
|
Fiscal 2007 | |
|
Fiscal 2009 | |
|
Fiscal 2011 | |
|
|
Due | |
|
Fiscal 2006(1) | |
|
and 2008 | |
|
and 2010 | |
|
and thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Convertible subordinated notes(2)
|
|
$ |
520,000 |
|
|
$ |
|
|
|
$ |
520,000 |
|
|
$ |
|
|
|
$ |
|
|
Purchase obligations(3)
|
|
$ |
204,105 |
|
|
$ |
204,105 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating leases(4)
|
|
$ |
413,040 |
|
|
$ |
45,296 |
|
|
$ |
142,216 |
|
|
$ |
85,451 |
|
|
$ |
140,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
1,137,145 |
|
|
$ |
249,401 |
|
|
$ |
662,216 |
|
|
$ |
85,451 |
|
|
$ |
140,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents obligations for the last 2 quarters of fiscal year
2006. |
|
(2) |
Convertible subordinated notes, due August 1, 2013, assumed
in connection with the VERITAS acquisition. On or after
August 5, 2006, Symantec has the option to redeem all or a
portion of the 0.25% Notes at a redemption price equal to
100% of the principal amount, plus accrued and unpaid interest.
On August 1, 2006 and August 1, 2008, or upon the
occurrence of a fundamental change involving Symantec, holders
of the 0.25% Notes may require Symantec to repurchase their
notes at a purchase price equal to 100% of the principal amount,
plus accrued and unpaid interest. The notes are currently
convertible at the option of the holder. If any holder elects to
convert prior to August 1, 2006, Symantec would pay the
holder the cash value of the applicable number of shares of
Symantec common stock ($22.66 per share at
September 30, 2005) up to the principal amount of the notes. |
|
(3) |
Purchase obligations are entered into in the normal course of
our business. As of September 30, 2005, we had total
purchase obligations of approximately $204 million, as
compared with $79 million at March 31, 2005, as
previously reported in our Annual Report on
Form 10-K for the
fiscal year ended March 31, 2005. The purchase obligations
as of September 30, 2005 include certain commitments
assumed in connection with the VERITAS acquisition and
post-acquisition integration activities. |
|
(4) |
We lease office space in various places around the world. As of
September 30, 2005, we had total operating lease
commitments of $414 million, as compared with
$119 million, as previously disclosed in Part II,
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, in our Annual
Report on
Form 10-K for the
fiscal year ended March 31, 2005. The operating lease
commitments as of September 30, 2005 include operating
leases assumed in connection with the VERITAS acquisition. |
During the June 2005 quarter, we entered into agreements in
connection with the construction of buildings in Springfield
(Oregon) and Culver City (California). Payment is contingent
upon the achievement of certain agreed-upon milestones. Certain
milestones were met in the September 2005 quarter resulting in
payments of $13 million. The remaining commitment is
$37 million as of September 30, 2005.
During the March 2005 quarter, we entered into a development
agreement in connection with the refurbishment of a building in
Dublin (Ireland). Payment of this amount is contingent upon the
achievement of certain agreed-upon milestones. Certain
milestones were met in the September 2005 quarter resulting in
payments of $17 million. The remaining commitment is
$8 million as of September 30, 2005.
51
On October 2, 2005, we entered into an agreement to acquire
BindView Development Corporation, a maker of computer-network
management and security software, for an estimated purchase
price of $209 million, excluding acquisition related costs.
The acquisition is expected to close in the fourth quarter of
fiscal 2006, subject to the satisfaction of closing conditions.
On October 5, 2005, we completed the acquisition of
WholeSecurity, Inc., a leading provider of behavior-based
security and anti-phishing technology, for $66 million in
cash, including an insignificant amount for acquisition-related
expenses.
On October 10, 2005, we completed the acquisition of Sygate
Technologies, a technology leader in endpoint compliance
solutions for $163 million in cash, including an
insignificant amount for acquisition-related expenses.
We have certain royalty commitments associated with the shipment
and licensing of certain products. Royalty expense is generally
based on a dollar amount per unit shipped or a percentage of
underlying revenue and has not been included in the table above.
Certain royalty commitments have minimum commitment obligations;
however, as of September 30, 2005 all such obligations are
immaterial.
As permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was, serving at
our request in such capacity. The indemnification period covers
all pertinent events and occurrences during the officers
or directors lifetime. The maximum potential amount of
future payments we could be required to make under these
indemnification agreements is not limited; however, we have
director and officer insurance coverage that reduces our
exposure and enables us to recover a portion or all of any
future amounts paid. We believe the estimated fair value of
these indemnification agreements in excess of applicable
insurance coverage is minimal.
Recent Accounting Pronouncements
In June 2005, the Financial Accounting Standards Board, or FASB,
issued FASB Staff Position, or FSP,
FAS 143-1,
Accounting for Electronic Equipment Waste Obligations,
which provides guidance on the accounting for certain
obligations associated with the Directive on Waste Electrical
and Electronic Equipment, or the Directive, which was adopted by
the European Union, or the EU. Under the Directive, the waste
management obligation for historical equipment, defined as
products put on the market on or prior to August 13, 2005,
remains with the commercial user until the equipment is
replaced. FSP
FAS 143-1 is
required to be applied to the later of the first fiscal period
ending after June 8, 2005 or the date of the
Directives adoption into law by the applicable EU member
countries in which we have significant operations. We are
currently evaluating the impact of FSP
FAS 143-1 on our
financial position and results of operations. The effects will
depend on the respective laws adopted by the EU member
countries.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which replaces
APB No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements An Amendment of APB Opinion
No. 28. SFAS No. 154 provides guidance on
accounting for and reporting changes in accounting principle and
error corrections. SFAS No. 154 requires that changes
in accounting principle be applied retrospectively to prior
period financial statements and is effective for fiscal years
beginning after December 15, 2005. We do not expect
SFAS No. 154 to have a material impact on our
consolidated financial position, results of operations, or cash
flows.
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, which requires companies to measure
and recognize compensation expense for all stock-based payments
at fair value. SFAS No. 123R is effective for annual
periods beginning after June 15, 2005 and, thus, will be
effective for us beginning with the
52
first quarter of fiscal 2007. We are currently evaluating the
impact of SFAS No. 123R on our financial position and
results of operations. See Stock-Based Compensation in
Note 1 of the Notes to Condensed Consolidated Financial
Statements for information related to the pro forma effects on
our reported net income and net income per share when applying
the fair value recognition provisions of the previous
SFAS No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets An Amendment of
APB Opinion No. 29, Accounting for Nonmonetary
Transactions. SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for
exchanges that do not have commercial substance.
SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
SFAS No. 153 is effective for fiscal periods beginning
after June 15, 2005. The adoption of SFAS No. 153
will not have a material impact on our consolidated financial
position, results of operations, or cash flows.
In December 2004, the FASB issued FSP FAS 109-1,
Application of FASB Statement No. 109, Accounting
for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act
of 2004. The American Jobs Creation Act introduces a special
tax deduction on qualified production activities. FSP
FAS 109-1 clarifies that this tax deduction should be
accounted for as a special deduction in accordance with
SFAS No. 109. We do not expect FSP FAS 109-1 to
have a material impact on our consolidated financial position,
results of operations, or cash flows.
Risk Factors
The acquisition of VERITAS may result in dilution of net
income per share. We expect that the acquisition of VERITAS
will result in a decrease in our overall revenue growth rate and
gross margin. The acquisition could also fail to produce the
benefits that we anticipate, or could have other adverse effects
that we currently do not foresee. In addition, some of the
assumptions that we have relied upon, such as the achievement of
operating synergies, may not be realized. As a result of these
or other factors, the acquisition may not result in improved net
income per share.
If we fail to successfully integrate the operations of
VERITAS, the combined company may not realize the potential
benefits of the acquisition. The integration of Symantec and
VERITAS is a time consuming and expensive process and may
disrupt our operations if it is not completed in a timely and
efficient manner. If this integration effort is not successful,
our results of operations could be harmed, employee morale could
decline, key employees could leave, and customers could cancel
existing orders or choose not to place new ones. Following the
completion of the acquisition, Symantec and VERITAS expect to
operate as a combined organization utilizing common information
and communication systems, operating procedures, financial
controls, and human resources practices. We may encounter the
following difficulties, costs, and delays involved in the
continued integration of these operations, any of which could
negatively impact our business and harm our results of
operations and financial condition:
|
|
|
|
|
Failure to successfully manage relationships with customers,
partners, and vendors |
|
|
|
Failure of customers to accept new products or services or to
continue using the products and services of the combined company |
|
|
|
Difficulties in successfully integrating the management, sales
force, and employees of Symantec and VERITAS |
|
|
|
Challenges encountered in managing larger, more geographically
dispersed operations |
|
|
|
Loss of key management personnel and employees |
|
|
|
Diversion of the attention of management from other primary
business matters |
|
|
|
Potential incompatibility of technologies and business processes
and systems |
53
|
|
|
|
|
Potential impairment charges resulting from the write-down of
the carrying value of acquired intangible assets |
|
|
|
Potential incompatibility of business cultures and practices |
If the combined companys operations do not meet the
expectations of existing customers of Symantec or VERITAS, then
these customers may cease doing business with the combined
company altogether, which would harm our results of operations
and financial condition.
Fluctuations in our quarterly financial results have affected
the price of our common stock in the past and could affect our
stock price in the future. Our quarterly financial results
have fluctuated in the past and are likely to vary significantly
in the future. In addition, our acquisition of VERITAS makes it
more difficult for us to predict, and securities analysts to
develop expectations regarding, our future financial results due
to the risks associated with the complexity of our combined
business and the integration of our management teams and
operations. If our quarterly financial results or our
predictions of future financial results fail to meet the
expectations of securities analysts and investors, our stock
price could be negatively affected. Any volatility in our
quarterly financial results may make it more difficult for us to
raise capital in the future or pursue acquisitions that involve
issuances of our stock or securities convertible into, or
exercisable for, our common stock. You should not rely on the
results of prior periods as predictors of our future performance.
Factors associated with the conduct of our business may cause
fluctuations in our quarterly financial results. A number of
factors associated with the operation of our business may cause
our quarterly financial results to fluctuate, including our
ability to:
|
|
|
|
|
Effectively align sales resources to meet customer needs and
address market opportunities |
|
|
|
Timely release new or enhanced versions of our products |
|
|
|
Effectively manage the integration of recent acquisitions |
|
|
|
Effectively respond to competitive pressures |
|
|
|
Effectively manage our operating expense levels |
Any of the foregoing factors could cause the trading price of
our common stock to fluctuate significantly.
Factors associated with our industry and the markets for our
products may cause fluctuations in our quarterly financial
results. A number of factors associated with our industry
and the markets for our products, many of which are outside our
control, may cause our quarterly financial results to fluctuate,
including:
|
|
|
|
|
Reduced demand for any of our products |
|
|
|
Entry of new competition into our markets |
|
|
|
Competitive pricing pressure across consumer channels and our
enterprise security business |
|
|
|
Timing and impact of threat outbreaks (e.g. worms and viruses) |
|
|
|
Cancellation, deferral, or limitation of orders by customers |
|
|
|
Fluctuations in foreign currency exchange rates |
|
|
|
The rate of adoption of new product technologies and new
releases of operating systems |
|
|
|
Weakness or uncertainty in general economic or industry
conditions |
Any of the foregoing factors could cause the trading price of
our common stock to fluctuate significantly.
The timing of orders by customers and channel partners may
cause fluctuations in our quarterly financial results. The
timing and amount of orders by customers and channel partners
and seasonality in their buying patterns may cause our quarterly
results to fluctuate. The risk of quarterly fluctuations is
increased by the fact that a significant portion of our
quarterly net revenues has historically been generated during
the last month of
54
each fiscal quarter. Most resellers have made 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. License orders and renewals for our consumer
security products have historically been higher in the December
quarter due primarily to customer holiday spending patterns.
License orders and renewals for our enterprise products have
also historically been higher in the December quarter due to
customer spending patterns and budget cycles and, in the case of
VERITAS products, the impact of VERITAS compensation plans
for its sales personnel. Due to the unpredictability of these
buying patterns, 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. If we do not
achieve our forecasted results for a particular quarterly
period, our stock price could decline significantly.
Accounting charges may cause fluctuations in our quarterly
financial results. Our financial results have been in the
past, and may continue to be in the future, materially affected
by non-cash and other accounting charges, including:
|
|
|
|
|
Amortization of intangible assets, including acquired product
rights |
|
|
|
Impairment of goodwill |
|
|
|
Stock-based compensation expense |
|
|
|
Restructuring charges and reversals of those charges |
|
|
|
Impairment of long-lived assets |
For example, in connection with our acquisition of VERITAS, we
have recorded approximately $3 billion of intangible
assets, including acquired product rights, and $9 billion
of goodwill. We have recorded and will continue to record future
amortization charges with respect to a portion of these
intangible assets and stock-based compensation expense related
to the stock options to purchase VERITAS common stock assumed by
us. In addition, we will evaluate our long-lived assets,
including property and equipment, goodwill, acquired product
rights, and other intangible assets, whenever events or
circumstances occur which indicate that these assets might be
impaired. Goodwill is evaluated annually for impairment in the
fourth quarter of each fiscal year, regardless of events and
circumstances. The foregoing types of accounting charges may
also be incurred in connection with or as a result of other
business acquisitions. The price of our common stock could
decline to the extent that our financial results are materially
affected by the foregoing accounting charges.
Our markets are competitive and our financial 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
competition or if existing or new competitors gain market share,
our sales may decline or be impaired and we may experience a
decline in the prices we can charge for our products, which
could adversely affect our operating results. Our competitive
position depends on several factors, including:
|
|
|
|
|
Our ability to respond to product price decreases implemented by
our competitors |
|
|
|
Our ability to adapt effectively to the continued development,
acquisition, or licensing of technology or product rights by our
competitors |
|
|
|
Our ability to enhance our products or develop new products that
are compatible with new hardware and operating systems |
|
|
|
Our ability to adapt to changing technological demands |
|
|
|
Our strategic decisions regarding the best allocation of our
limited resources |
Our competitors include or may include the following:
|
|
|
|
|
Independent software vendors who may offer products that
directly compete with our products or bundle their software
products with software offered by another vendor either directly
or as part of a hardware appliance |
|
|
|
Large operating system providers and network equipment and
computer hardware manufacturers who may include security, remote
access, or storage tools in their product offerings |
55
|
|
|
|
|
The internal development groups of storage hardware providers,
many of whom are our strategic partners, who may develop their
own Storage and Server Management software and utility computing
infrastructure for their own storage and server hardware products |
|
|
|
Internet service providers, or ISPs, that provide security
functionality to their subscribers at no additional fee |
Microsoft has added security and remote access features to new
versions of its operating system products. Microsoft has also
recently announced the acquisition of companies that offer
security products that compete more directly with our security
products and its intent to acquire an
e-mail security
services company that competes with our services. In addition,
Microsoft has recently announced an online subscription service
that includes automated protection, maintenance, and performance
tuning, which is expected to be available to the general public
in the near future. Microsoft has also recently introduced a
free beta version of an antispyware product for the consumer
market, and has recently released a disk-based
back-up and recovery
product for its server based operating system. This disk-based
back-up product
interoperates with our Windows backup solutions, BackupExec and
NetBackup. Some of the backup and recovery functionality of the
Microsoft offering is competitive with our backup and recovery
functionality. In the future, Microsoft may offer additional
features or products that compete with our products.
Many of our strategic partners and storage software vendors
offer software products, and customers may prefer to purchase
software and hardware that is produced by the same vendor. In
addition, these vendors may choose not to offer our products to
their customers or to limit our access to their hardware
platforms. Similarly, some software vendors may choose to bundle
their software with their own or other vendors software or
may limit our access to standard product interfaces and inhibit
our ability to develop products for their platform.
Several of our current and potential competitors have greater
financial, technical, sales, marketing, or other resources than
we do and consequently may have an ability to influence
customers to purchase their products instead of ours. Our future
and existing competitors could introduce products with superior
features, scalability, and functionality at lower prices than
our products, and could also bundle existing or new products
with other more established products in order to compete with
us. Our competitors could also gain market share by acquiring or
forming strategic alliances with our other competitors and ISPs
such as AOL and Comcast. In addition, because new distribution
methods offered by the Internet and electronic commerce have
removed many of the barriers to entry historically faced by
start-up companies in
the software industry, we may face additional sources of
competition in the future. If we do not adapt our business in
the face of this competition, our business and operating results
may be adversely affected.
Because we derive a majority of our license revenues from
sales of a few product lines, any decline in demand for these
products could severely harm our ability to generate
revenues. We derive a majority of our revenues from a
limited number of software products, including our antivirus,
Internet security, Data Protection, and Storage and Server
Management products. In addition, our software products are
concentrated within the markets for data security and data
storage. As a result, we are particularly vulnerable to
fluctuations in demand for these products, whether as a result
of competition, product obsolescence, technological change,
customer spending, or other factors. If our revenues derived
from these software products were to decline significantly, our
business and operating results would be adversely affected.
We may not be able to achieve expected growth rates in sales
of our products, particularly our consumer security
products. Up until our most recent quarter, we had
experienced a higher than expected rate of growth in sales of
our consumer security protection products. We believe that
historical growth rates for our consumer security protection
products has been spurred by a number of factors, including
increased broadband usage and increased awareness of security
threats to consumer systems, including several well publicized
viruses. The impact of these factors could diminish over time
with greater market penetration, and the growth rates in sales
of consumer security protection products may decline in the
future.
If we are unable to develop new and enhanced products that
achieve widespread market acceptance, we may be unable to
recover product development costs, and our earnings and revenues
may decline. Our future
56
success depends on our ability to address the rapidly changing
needs of our customers by developing and introducing new
products, product upgrades, and services on a timely basis. We
have incurred, and we will need to continue to incur,
significant research and development expenditures in future
periods as we strive to remain competitive. New product
development and introduction involve a significant commitment of
time and resources and are subject to a number of risks and
challenges, including:
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Keeping pace with technological developments by competitors and
customers |
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Extending the operation of our products to new platforms and
operating systems |
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Entering into new and unproven markets with which we have
limited experience, including security appliances, utility
computing infrastructure, storage area networking, and storage
resource management |
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Managing new product and service strategies, including
integrating our various security and storage technologies,
management, customer service, and support into a single
enterprise security and storage solution |
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Managing the length of the development cycle for new products
and product enhancements, which has frequently been longer than
we originally expected |
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Adapting to emerging and evolving industry standards |
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Incorporating acquired products and technologies |
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Developing new sales channels |
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Obtaining source code licenses from operating system software
vendors on reasonable terms |
If we are not successful in managing these risks and challenges,
or if our new product introductions are not technologically
competitive or do not achieve market acceptance, we will have
expended substantial resources and capital without realizing
sufficient revenues in return, and our business and operating
results could be adversely affected.
We have grown, and may continue to grow, through acquisitions
that give rise to risks and challenges that could adversely
affect our future financial results. We have in the past
acquired, and we expect in the future to acquire, other
businesses, business units, and technologies. Acquisitions
involve a number of special risks and challenges, including:
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Complexity, time, and costs associated with integration of
acquired business operations, employees, products, and
technologies into our existing business, workforce, and product
lines |
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Diversion of management time and attention from our existing
business and other business opportunities |
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Loss or termination of employees, including costs associated
with the termination of those employees |
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Assumption of debt or other liabilities of the acquired
business, including litigation related to alleged liabilities of
the acquired business |
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The incurrence of additional acquisition-related debt as well as
increased expenses and working capital requirements |
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Dilution of stock ownership of existing stockholders or earnings
per share |
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Increased costs and efforts in connection with compliance with
Section 404 of the Sarbanes-Oxley Act |
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Substantial accounting charges for amortization of intangible
assets, restructuring and related expenses, stock-based
compensation expense, write-offs of in-process research and
development, and impairment of goodwill |
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
57
acquired operations and integrate 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, and our willingness to acquire
additional businesses in the future. Other challenges of
integration include our ability to incorporate acquired products
and business technology into our existing product lines,
including consolidating technology with duplicative
functionality or designed on a different technological
architecture, and our ability to sell the acquired products
through our existing or acquired sales channels. We also must
effectively integrate the different cultures of acquired
business organizations into our own in a way that aligns common
interests. 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 working capital requirements.
Any of the foregoing and other factors could harm our ability to
achieve anticipated levels of profitability from acquired
businesses or to realize other anticipated benefits of
acquisitions. We may face difficulties in entering markets in
which we have no or limited direct prior experience and where
competitors in such markets have stronger market positions.
Mergers and acquisitions of high technology companies are
inherently risky, and no assurance can be given that our
previous or future acquisitions will be successful and will not
materially adversely affect our business, operating results, or
financial condition.
VERITAS has reported a material weakness in its internal
control over financial reporting, and we have not yet assessed
the impact of this situation on our internal controls. As
reported by VERITAS in its
Form 10-Q for its
fiscal quarter ended March 31, 2005, VERITAS concluded that
its disclosure controls and procedures were not effective as of
March 31, 2005 as a result of a material weakness in its
internal control over financial reporting. VERITAS ceased to be
a public reporting company prior to the filing of a quarterly
report for its quarter ended June 30, 2005 and, therefore,
did not express a conclusion as to the status of its disclosure
controls and procedures as of that date. We have not assessed
the impact that the material weakness referred to in the
VERITAS quarterly report on
Form 10-Q for the
quarter ended March 31, 2005 will have on our internal
control over financial reporting. We cannot assure you that such
material weakness will not cause us to determine that our
internal control over financial reporting is not effective as of
the end of our current fiscal year.
Our international operations involve special risks that could
increase our expenses, adversely affect our operating results,
and require increased time and attention of our management.
We derive a substantial portion of our revenues from customers
located outside of the U.S. and we have significant operations
outside of the U.S., including engineering, sales, customer
support, and production operations. We plan to expand our
international operations, but such expansion is contingent upon
the financial performance of our existing international
operations as well as our identification of growth
opportunities. Our international operations are subject to risks
in addition to those faced by our domestic operations, including:
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Potential loss of proprietary information due to piracy,
misappropriation, or laws that may be less protective of our
intellectual property rights |
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Imposition of foreign laws and other governmental controls,
including trade and labor restrictions and related laws that
reduce the flexibility of our business operations |
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Enactment of additional regulations or restrictions on the use,
import, or export of encryption technologies, which could delay
or prevent the acceptance and use of encryption products and
public networks for secure communications |
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Fluctuations in currency exchange rates and economic instability
such as higher interest rates and inflation, which could reduce
our customers ability to obtain financing for software
products or which could make our products more expensive in
those countries |
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Limitations on future growth or inability to maintain current
levels of revenues from international sales if we do not invest
sufficiently in our international operations |
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Longer payment cycles for sales in foreign countries and
difficulties in collecting accounts receivable |
58
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Difficulties in staffing, managing, and operating our
international operations, including difficulties related to
administering our stock plans in some foreign countries |
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Difficulties in coordinating the activities of our
geographically dispersed and culturally diverse operations |
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Seasonal reductions in business activity in the summer months in
Europe and in other periods in other countries |
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Reduced sales due to the failure to obtain any required export
approval of our technologies, particularly our encryption
technologies |
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Costs and delays associated with developing software in multiple
languages |
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Political unrest, war, or terrorism, particularly in areas in
which we have facilities |
A significant portion of our transactions outside of the
U.S. are denominated in foreign currencies. Accordingly,
our future operating results will continue to be subject to
fluctuations in foreign currency rates. Although we hedge
against certain foreign currency exposures, hedging foreign
currency transaction exposures is complex and subject to
uncertainty. We may be negatively affected by fluctuations in
foreign currency rates in the future, especially if
international sales continue to grow as a percentage of our
total sales.
We receive significant tax benefits from sales to our
non-U.S. customers.
These benefits are contingent upon existing tax regulations in
the U.S. and in the countries in which our international
operations are located. Future changes in domestic or
international tax regulations could adversely affect our ability
to continue to realize these tax benefits.
If we lose key personnel or fail to integrate replacement
personnel successfully, our ability to manage our business could
be impaired. Our future success depends upon the continued
service of our key management, technical, sales, finance, and
other critical personnel. Our officers and other key personnel
are employees-at-will, and we cannot assure you that we will be
able to retain them. Key personnel have left our company in the
past and there likely will be additional departures of key
personnel from time to time in the future. The loss of any key
employee could result in significant disruptions to our
operations, including adversely affecting the timeliness of
product releases, the successful implementation and completion
of company initiatives, the effectiveness of our disclosure
controls and procedures and our internal control over financial
reporting, and the results of our operations. In addition,
hiring, training, and successfully integrating replacement sales
and other personnel could be time consuming, may cause
additional disruptions to our operations, and may be
unsuccessful, which could negatively impact future revenues.
If we are unable to attract and retain qualified employees
and manage our employee base effectively, we may be unable to
develop new and enhanced products, effectively manage or expand
our business, or increase our revenues. Our future success
depends upon our ability to recruit and retain highly skilled
management, sales, marketing, finance, and technical personnel.
However, competition for people with the specific skills that we
require is significant. In order to attract and retain personnel
in a competitive marketplace, we believe that we must provide a
competitive compensation package, including cash and
equity-based compensation. The volatility in our stock price may
from time to time adversely affect our ability to retain or
attract employees. In addition, we may be unable to obtain
required stockholder approvals of future increases in the number
of shares available for issuance under our equity compensation
plans and recent changes in accounting rules will require us to
treat the issuance of employee stock options and other forms of
equity-based compensation as compensation expense, beginning in
the first quarter of fiscal 2007. As a result, we may decide to
issue fewer stock options and may be impaired in our efforts to
attract and retain necessary personnel. If we are unable to hire
and retain qualified employees, or conversely, if we fail to
manage employee performance or reduce staffing levels when
required by market conditions, our business and operating
results could be adversely affected.
If we fail to manage our distribution channels effectively,
or if our partners choose not to market and sell our products to
their customers, our operating results could be adversely
affected. We sell our consumer products to individuals and
small offices/home offices around the world through a
multi-tiered distribution
59
network. Our consumer products are available to customers
through indirect channels that include distributors, retailers,
direct marketers, Internet-based resellers, educational
institutions, and ISPs, as well as through OEMs. We separately
sell annual content update subscriptions directly to end users
primarily via the Internet. We also sell some of our products
and product upgrades through direct mail/email and over the
Internet, in conjunction with channel partners. We sell our
enterprise products and related services both directly to
end-users and through a variety of indirect sales channels,
which include value-added resellers, distributors, system
integrators and OEMs.
Direct Sales. A significant portion of our revenue from
enterprise products will be derived from sales by our direct
sales force to end-users. This sales channel involves special
risks, including:
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Longer sales cycles associated with direct sales efforts |
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Difficulty in managing and integrating the direct sales force
following our acquisition of VERITAS |
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Difficulty in hiring, training, retaining, and motivating our
direct sales forces |
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Substantial amounts of training for sales representatives to
become productive, including regular updates to cover new and
revised products |
Indirect Sales Channels. A significant portion of our
revenues are derived from sales through indirect channels,
including distributors that sell our products to end-users and
other resellers. This channel involves a number of special
risks, including:
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Our lack of control over the timing of delivery of our products
to end-users |
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Our resellers and distributors are not subject to minimum sales
requirements or any obligation to market our products to their
customers |
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Our reseller and distributor agreements are generally
nonexclusive and may be terminated at any time without cause |
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Our resellers and distributors may market and distribute
competing products, in part due to pricing, terms, and
promotions offered by our competitors and other factors that we
do not control and cannot predict |
OEM Sales Channels. A significant portion of our revenues
are derived from sales through our OEM partners that incorporate
our products into, or bundle our products with, their products.
Our reliance on this sales channel involves many risks,
including:
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Our lack of control over the shipping dates or volume of systems
shipped |
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Our OEM partners are not subject to minimum sales requirements
or any obligation to market our products to their customers |
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Our OEM partners may terminate or renegotiate their arrangements
with us and new terms may be less favorable in recognition of
our increasingly competitive relationship with certain partners |
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Our OEM arrangements subject us to factors affecting the
products of our OEM partners, which may result in changes in
strategic direction, competitive risks, and other issues that
could result in reduction of OEM sales |
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The development work that we must generally undertake under our
agreements with our OEM partners may require us to invest
significant resources and incur significant costs with little or
no associated revenues |
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The time and expense required for the sales and marketing
organizations of our OEM partners to become familiar with our
products may make it more difficult to introduce those products
to the market |
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Our OEM partners may develop, market, and distribute their own
products and market and distribute products of our competitors,
which could reduce our sales |
60
If we fail to manage our distribution channels successfully, our
distribution channels may conflict with one another or otherwise
fail to perform as we anticipate, which could reduce our sales
and increase our expenses, as well as weaken our competitive
position. Some distribution partners have experienced financial
difficulties in the past, and if our partners suffer financial
difficulties in the future, we may have reduced sales or
increased bad debt expense, which would adversely affect our
operating results. In addition, reliance on multiple channels
subjects us to events that cause unpredictability in demand.
This increases the risk that we may not plan effectively for the
future, which could result in adverse operating results in
future periods.
Increased reliance on sales of enterprise licenses may result
in greater fluctuations in, or otherwise adversely affect, our
financial results. Sales of enterprise licenses 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, may involve greater
pricing pressure, and sometimes result in lower operating
margins. The timing of the execution of volume licenses, or
their non-renewal 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. In addition, longer license periods impede our
ability to increase prices due to increased costs and may
adversely impact our operating margins.
We are a party to several class action and derivative action
lawsuits, which could require significant management time and
attention and result in significant legal expenses, and which
could, if not determined favorably, negatively impact our
business, financial condition, results of operations, and cash
flows. We have been named as a party to several class action
and derivative action lawsuits, and we may be named in
additional litigation. The expense of defending such litigation
may be costly and divert managements attention from the
day-to-day operations
of our business, which could adversely affect our business,
results of operations, and cash flows. In addition, an
unfavorable outcome in such litigation could negatively impact
our business, results of operations, and cash flows.
Third parties claiming that we infringe their proprietary
rights could cause us to incur significant legal expenses and
prevent us from selling our products. From time to time, we
have received claims that we have infringed the intellectual
property rights of others. As the number of products in the
software industry increases and the functionality of these
products further overlap, we believe that we may become
increasingly subject to infringement claims, including patent,
copyright, and trademark infringement claims. We have received
several trademark claims in the past and may receive more claims
in the future from third parties who may also be using our name
or another name that may be similar to one of our trademarks or
service marks. We have also received patent infringement claims
in the past and may receive more claims in the future based on
allegations that our products infringe upon patents held by
third parties. In addition, former employers of our former,
current, or future employees may assert claims that such
employees have improperly disclosed to us the confidential or
proprietary information of these former employers. Any such
claim, with or without merit, could:
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Be time consuming to defend |
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Result in costly litigation |
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Divert managements time and attention from our business |
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Require us to stop selling, to delay shipping, or to redesign
our products |
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Require us to pay monetary amounts as damages, to enter into
royalty or licensing arrangements, or to satisfy indemnification
obligations that we have with some of our customers |
In addition, we license and use software from third parties in
our business. These third party software licenses may not
continue to be available to us on acceptable terms. Also, these
third parties may from time to time receive claims that they
have infringed the intellectual property rights of others,
including patent and copyright infringement claims, which may
affect our ability to continue licensing their software. Our
inability to use any of this third party software could result
in shipment delays or other disruptions in our business, which
could materially and adversely affect our operating results.
61
If we do not protect our proprietary information and prevent
third parties from making unauthorized use of our products and
technology, our financial results could be harmed. Our
software and underlying technology are proprietary. We seek to
protect our proprietary rights through a combination of
confidentiality agreements and procedures and copyright, patent,
trademark, and trade secret laws. However, all of these measures
afford only limited protection and may be challenged,
invalidated, or circumvented by third parties. Third parties may
copy all or portions of our products or otherwise obtain, use,
distribute and sell our proprietary information without
authorization. Third parties may also develop similar or
superior technology independently, by designing around our
patents. Our shrink-wrap license agreements are not signed by
licensees and therefore may be unenforceable under the laws of
some jurisdictions. 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 in those
countries. The unauthorized copying or use of our products or
proprietary information could result in reduced sales of our
products. In addition, any legal action to protect proprietary
information that we may bring or be engaged in, alone or through
our alliances with Business Software Alliance (BSA), or the
Software & Information Industry Association (SIIA),
could be expensive, may distract management from
day-to-day operations
and could lead to additional claims against us, which, if we are
not successful in defending against, could have a negative
impact on our operating results
Our products are complex and operate 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, especially when the
products 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. 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. In addition, despite testing by us and by
others, errors, failures, or bugs may not be found in new
products or releases until after commencement of commercial
shipments. In the past, we have discovered software errors,
failures, and bugs in certain of our product offerings after
their introduction and have experienced delayed or lost revenues
during the period required to correct these errors.
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, loss of competitive
position, or claims by customers or others. Many of our end-user
customers use our products in applications that are critical to
their businesses and may have a greater sensitivity to defects
in our products than to defects in other less critical software
products. In addition, if an actual or perceived breach of
information integrity or availability occurs in one of our
end-user customers systems, regardless of whether the
breach is attributable to our products, the market perception of
the effectiveness of our products could be harmed. 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
our operating results.
Increased customer demands on our technical support services
may adversely affect our financial results. We offer
technical support services with many of our products. We may be
unable to respond quickly enough to short-term increases in
customer demand for support services. We also may be unable to
modify the format of our support services to compete with
changes in support services provided by competitors or
successfully integrate support for our customers. Further
customer demand for these services, without corresponding
revenues, could increase costs and adversely affect our
operating results.
We have outsourced a substantial portion of our worldwide
consumer support functions to third party service providers. If
these companies experience financial difficulties, do not
maintain sufficiently skilled workers and resources to satisfy
our contracts or otherwise fail to perform at a sufficient level
under these contracts, the level of support services to our
customers may be significantly disrupted, which could materially
harm our relationships with these customers.
62
Our inability to timely distribute our products and services
over the Internet, including security patches and content
updates, could adversely affect our business. Our ability to
maintain and increase the speed with which we provide services
to customers and to increase the scope of these services is
limited by and dependent upon the speed and reliability of the
Internet. We are increasingly reliant on the Internet as a means
to distribute our security patches and content updates to our
customers. Accordingly, if we, or our customers, are unable to
utilize the Internet due to a failure of technology or
infrastructure, terrorist activity, or other reasons, our
ability to provide services may suffer, which could lead to a
decrease in revenues.
Our software products and Web site may be subject to
intentional disruption, which could adversely impact our
reputation and future sales. Although we believe we have
sufficient controls in place to prevent intentional disruptions,
we expect to be an ongoing target of attacks specifically
designed to impede the performance of our products. Similarly,
experienced computer programmers may attempt to penetrate our
network security or the security of our Web site and
misappropriate proprietary information or cause interruptions of
our services. Because the techniques used by such computer
programmers to access or sabotage networks change frequently and
may not be recognized until launched against a target, we may be
unable to anticipate these techniques. Our activities could be
adversely affected, and our reputation and future sales harmed,
if these intentionally disruptive efforts are successful.
Our stock price may be volatile in the future, and you could
lose the value of your investment. The market price of our
common stock has experienced significant fluctuations in the
past and may continue to fluctuate in the future, and as a
result you could lose the value of your investment. The market
price of our common stock may be affected by a number of
factors, including:
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Announcements of quarterly operating results and revenue and
earnings forecasts by us, our competitors, or our customers |
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Failure to achieve financial forecasts, either because expected
sales do not occur or because they occur at lower prices or on
terms that are less favorable to us |
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Rumors, announcements, or press articles regarding changes in
our management, organization, operations, or prior financial
statements |
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Changes in revenue and earnings estimates by securities analysts |
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Announcements of planned acquisitions by us or by our competitors |
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Announcements of new or planned products by us, our competitors,
or our customers |
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Gain or loss of a significant customer |
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Inquiries by the SEC, Nasdaq, law enforcement, or other
regulatory bodies |
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Acts of terrorism, the threat of war, and economic slowdowns in
general |
The stock market in general, and the market prices of stocks of
technology companies in particular, have experienced extreme
price volatility, which has adversely affected and may continue
to adversely affect the market price of our common stock for
reasons unrelated to our business or operating results.
Factors outside of our control may adversely affect our
operations and operating results. Our operations and
operating results may be adversely affected by many different
factors which are outside of our control, including:
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Deterioration in economic conditions in any of the multiple
markets in which we operate, which could reduce customer demand
and ability to pay for our products and services |
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Political and military instability, which could slow spending
within our target markets, delay sales cycles, and otherwise
adversely affect our ability to generate revenues and operate
effectively |
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Budgetary constraints of customers, which are influenced by
corporate earnings and government budget cycles and spending
objectives |
63
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Disruptions in our highly automated business operations caused
by: |
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Earthquakes, floods, or other natural disasters affecting our
headquarters located in Silicon Valley, California, an area
known for seismic activity, or our other locations worldwide |
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Acts of war or terrorism |
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Malicious software programs, such as viruses and worms, or
security breaches |
Any of these factors could result in a loss of revenues and/or
higher expenses, which could adversely affect our financial
results.
Our effective tax rate may increase or fluctuate, which could
increase our income tax expense and reduce our net income.
Our effective tax rate could be adversely affected by several
factors, many of which are outside of our control, including:
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Changes in the relative proportions of revenues and income
before taxes in the various jurisdictions in which we operate
that have differing statutory tax rates |
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Changing tax laws, regulations, and interpretations in multiple
jurisdictions in which we operate as well as the requirements of
certain tax rulings |
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Changes in accounting and tax treatment of stock-based
compensation |
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The tax effects of purchase accounting for acquisitions and
non-recurring charges, which may cause fluctuations between
reporting periods |
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Tax assessments, including those against acquired entities with
respect to tax periods prior to the acquisitions, that may
significantly affect our effective tax rate for the period in
which the settlements take place |
64
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Item 3. |
Quantitative and Qualitative Disclosures About Market
Risk |
We are exposed to market risk related to fluctuations in market
prices, interest rates, and foreign currency exchange rates. We
use certain derivative financial instruments to manage these
risks. All financial instruments used are in accordance with our
global investment policy and global foreign exchange policy. We
do not use derivative financial instruments for trading or
speculative purposes.
We also hold equity interests in several privately-held
companies. These investments were recorded at cost, and are
classified as Other long-term assets on the Condensed
Consolidated Balance Sheets. These investments are inherently
risky and we could lose our entire investment in these
companies. As of September 30, 2005, these investments had
an aggregate carrying value of $17 million.
Interest Rate Sensitivity
We consider investments in highly liquid instruments purchased
with an original maturity of 90 days or less to be cash
equivalents. All of our cash equivalents and short-term
investments are classified as available-for-sale securities as
of the balance sheet dates. Our available-for-sale securities
are reported at fair market value and any unrealized gains and
losses are included as a component of Stockholders equity
in Accumulated other comprehensive income on our Condensed
Consolidated Balance Sheets. Our cash equivalents and short-term
investments consist primarily of corporate securities, taxable
auction rate securities, U.S. government and
government-sponsored securities, and money market funds. The
following table presents the fair value and hypothetical changes
in fair market values of our significant financial instruments
held as of September 30, 2005 that are sensitive to changes
in interest rates (in thousands):
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Hypothetical Change in Fair Market Values Given an | |
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Interest Rate Increase (Decrease) of X Basis Points (bps) | |
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Investment Portfolios |
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Fair Value |
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150 bps |
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100 bps |
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50 bps |
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(25 bps) | |
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(75 bps) | |
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Significant financial instruments
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$3,163,004 |
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$(21,656) |
|
$(14,438) |
|
$(7,219) |
|
$ |
3,609 |
|
|
$ |
10,828 |
|
The modeling technique used above measures the change in fair
market value arising from selected potential changes in interest
rates. Market changes reflect immediate hypothetical parallel
shifts in the yield curve of minus 75 basis points, minus
25 basis points, plus 50 basis points, plus
100 basis points, and plus 150 basis points, which are
representative of potential movements in the United States
Federal Funds Rate and the Euro Area ECB Rate.
Exchange Rate Sensitivity
We conduct business in 32 international currencies through our
worldwide operations. We believe that the use of foreign
exchange forward contracts should reduce the risks that arise
from conducting business in international markets.
We hedge risks associated with certain foreign currency cash,
investments, receivables, and payables in order to minimize the
impact of changes in foreign currency fluctuations on these
assets and liabilities denominated in foreign currencies.
Foreign exchange forward contracts as of September 30, 2005
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resulting Increase (Decrease) in FV of | |
|
|
|
|
Foreign Forward Exchange Contracts | |
|
|
|
|
Given X% Appreciation (Devaluation) | |
|
|
|
|
of Foreign Currency | |
|
|
Notional | |
|
| |
Foreign Forward Exchange Contracts |
|
Amount | |
|
10% | |
|
5% | |
|
(5)% | |
|
(10)% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Purchased
|
|
$ |
109 |
|
|
$ |
10 |
|
|
$ |
5 |
|
|
$ |
(6 |
) |
|
$ |
(12 |
) |
Sold
|
|
$ |
435 |
|
|
$ |
(39 |
) |
|
$ |
(21 |
) |
|
$ |
23 |
|
|
$ |
48 |
|
We believe that these foreign exchange forward contracts do not
subject us to undue risk from the movement of foreign exchange
rates because gains and losses on these contracts are offset by
losses and gains on the underlying assets and liabilities. All
contracts have a maturity of no more than 35 days. Gains and
65
losses are included in Interest and other income, net, each
period. We regularly review our hedging program and may make
changes as a result of this review.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and
Procedures
The Securities and Exchange Commission, or SEC, defines the term
disclosure controls and procedures to mean a
companys 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, as amended, is recorded, processed, summarized, and
reported within the time periods specified in the SECs
rules and forms. Our Chief Executive Officer and our Chief
Financial Officer previously concluded, based on an evaluation
of the effectiveness of our disclosure controls and procedures
by our management, with the participation of our Chief Executive
Officer and our Chief Financial Officer, that our disclosure
controls and procedures were effective for this purpose as of
September 30, 2005. However, subsequent to the filing of
our quarterly report on Form 10-Q with the SEC for the
quarter ended September 30, 2005, we identified a material
weakness in our internal control over financial reporting, as
described in Item (b) below. Solely because of this
material weakness, our Chief Executive Officer and our acting
Chief Financial Officer have now concluded that our disclosure
controls and procedures were ineffective for the purpose set
forth above as of September 30, 2005.
(b) Material Weakness in Our Internal Controls
Subsequent to the filing of our quarterly report on
Form 10-Q with the SEC for the quarter ended
September 30, 2005, we identified a misclassification in
our Condensed Consolidated Statement of Cash Flows for the
six-month period ended September 30, 2005, as described
more fully herein in Note 2 of the Notes to Condensed
Consolidated Financial Statements. We have determined that this
misclassification was the result of a material weakness in our
internal control over financial reporting as of
September 30, 2005, specifically with regard to our review
procedures related to non-routine items in our Condensed
Consolidated Statements of Cash Flows. A material weakness is a
significant deficiency, as defined in Public Company Accounting
Oversight Board Auditing Standard No. 2, or a combination
of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of a companys
annual or interim financial statements would not be prevented or
detected by company personnel in the normal course of performing
their assigned functions. During the quarter ended
December 30, 2005, we implemented additional controls in
our internal control over financial reporting, as described in
Item (d) below, which we believe have remediated this
material weakness.
(c) Material Weakness in VERITAS Internal
Controls
On July 2, 2005, we completed the acquisition of VERITAS
Software Corporation. As reported by VERITAS in its
Form 10-K for its year ended December 31, 2004,
VERITAS management made an assessment of the effectiveness
of its internal control over financial reporting as of
December 31, 2004. Based on this assessment, VERITAS
management identified control deficiencies in VERITAS
internal control over financial reporting that resulted in
errors in accounting for software revenue recognition and
concluded that, in the aggregate, these deficiencies constituted
a material weakness in VERITAS internal control over
financial reporting as of December 31, 2004.
We have not completed our own assessment of these control
deficiencies and their impact on our internal control over
financial reporting. We expect to assess the effectiveness of
our internal control over financial reporting, including the
impact of the foregoing control deficiencies of VERITAS on our
internal control over financial reporting, as of March 31,
2006. Accordingly, we cannot assure you that the material
weakness described by VERITAS in its annual report on
Form 10-K for the year ended December 31, 2004 will
not cause us to determine that our internal control over
financial reporting is not effective as of the end of our
current fiscal year.
66
(d) Changes in Internal Control over Financial
Reporting.
As a result of our acquisition of VERITAS, we have expanded our
internal control over financial reporting to include some of
VERITAS internal controls. We have consolidated many of
the operations of VERITAS into our system of internal controls,
but we have also added additional internal controls of VERITAS,
including VERITAS enterprise resource planning system. In
addition, we have developed new procedures to support
VERITAS financial reporting and software revenue
accounting processes. Except as described above, during the
quarter ended September 30, 2005, there were no other
changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Since September 30, 2005, we have implemented additional
controls in our internal control over financial reporting to
remediate the material weakness described in Item
(b) above. Specifically, we have developed a supplemental
review checklist for the statement of cash flows which includes
questions relating to non-routine transactions and specifically
to accruals for investing or financing transactions. In
addition, we have added a process to our review of the statement
of cash flows in which a formal quarterly cash flow analytical
is prepared to highlight variances in the statement of cash
flows between reporting periods. We believe that these actions
have fully remediated the material weakness described in Item
(b) above.
(e) Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our
acting Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal controls will
prevent all errors and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within Symantec
have been detected.
PART II. OTHER INFORMATION
|
|
Item 1. |
Legal Proceedings |
Information with respect to this Item may be found in
Note 11 of the Notes to Condensed Consolidated Financial
Statements in this
Form 10-Q/A, which
information is incorporated into this Item 1 by reference.
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
Stock repurchases during the three-month period ended
September 30, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value of | |
|
|
|
|
|
|
Total Number of | |
|
Shares That | |
|
|
Total | |
|
|
|
Shares Purchased | |
|
May yet be | |
|
|
Number of | |
|
Average | |
|
Under Publicly | |
|
Purchased | |
|
|
Shares | |
|
Price Paid | |
|
Announced Plans | |
|
Under the Plans | |
|
|
Purchased | |
|
per Share | |
|
or Programs | |
|
or Programs | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(In millions) | |
July 2, 2005 to July 29, 2005
|
|
|
136,500 |
|
|
$ |
21.99 |
|
|
|
136,500 |
|
|
$ |
3,467 |
|
July 30, 2005 to August 26, 2005
|
|
|
32,838,500 |
|
|
$ |
21.71 |
|
|
|
32,838,500 |
|
|
$ |
2,754 |
|
August 27, 2005 to September 30, 2005
|
|
|
51,194,500 |
|
|
$ |
21.57 |
|
|
|
51,194,500 |
|
|
$ |
1,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
84,169,500 |
|
|
$ |
21.63 |
|
|
|
84,169,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 16, 2001, the Board of Directors approved a plan
to repurchase up to $700 million of Symantec common stock.
The plan had a repurchase limitation of 60 million shares,
and did not have an expiration date. In January 2004, the Board
increased the authorized amount for share repurchases by
67
$240 million without a repurchase limitation, and increased
that amount again by $300 million in October 2004. On
March 28, 2005, the Board increased the authorized amount
for share repurchases by $3 billion, effective upon
completion of our acquisition of VERITAS on July 2, 2005.
The repurchase plan does not include a repurchase limitation or
an expiration date. We commenced repurchases using the
$3 billion authorization on August 2, 2005 and
anticipate completing all repurchases under this authorization
by the end of November 2005. As of September 30, 2005,
approximately $2 billion remained authorized for stock
repurchases.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
We held our Annual Meeting of Stockholders on September 16,
2005. At the meeting, our stockholders voted on the following
two proposals, both of which were approved. Our stockholders
cast their votes as follows:
Proposal 1: To elect the following nominees as directors:
|
|
|
|
|
|
|
|
|
Nominee |
|
For | |
|
Withheld | |
|
|
| |
|
| |
Gary L. Bloom
|
|
|
1,028,956,227 |
|
|
|
16,561,522 |
|
Michael Brown
|
|
|
1,036,707,664 |
|
|
|
8,810,085 |
|
William T. Coleman
|
|
|
1,037,040,366 |
|
|
|
8,477,383 |
|
David L. Mahoney
|
|
|
1,037,016,694 |
|
|
|
8,501,055 |
|
Robert S. Miller
|
|
|
903,400,201 |
|
|
|
142,117,548 |
|
George Reyes
|
|
|
1,037,089,867 |
|
|
|
8,427,882 |
|
David Roux
|
|
|
1,034,442,593 |
|
|
|
11,075,156 |
|
Daniel H. Schulman
|
|
|
1,036,986,407 |
|
|
|
8,531,342 |
|
John W. Thompson
|
|
|
1,015,775,746 |
|
|
|
29,742,003 |
|
V. Paul Unruh
|
|
|
1,036,913,582 |
|
|
|
8,604,167 |
|
Proposal 2: To ratify the appointment of KPMG LLP as
Symantecs independent auditors for the 2006 fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker |
For |
|
Against |
|
Abstain |
|
Non-votes |
|
|
|
|
|
|
|
1,035,375,419
|
|
4,240,425 |
|
5,901,867 |
|
|
68
PART II. OTHER INFORMATION
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
10 |
.01* |
|
Form of FY06 Executive Annual Incentive Plan |
|
|
10 |
.02* |
|
Form of FY06 Executive Supplemental Annual Incentive Plan |
|
|
31 |
.01 |
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31 |
.02 |
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
32 |
.01** |
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
32 |
.02** |
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
* |
Management contract or compensatory plan or arrangement. |
|
|
** |
This exhibit is being furnished rather than filed, and shall not
be deemed incorporated by reference into any filing, in
accordance with Item 601 of
Regulation S-K.
|
|
|
|
|
|
Filed with initial filing of the
Form 10-Q on
November 9, 2005. |
69
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
|
|
SYMANTEC CORPORATION |
|
(Registrant) |
|
|
|
|
|
John W. Thompson |
|
Chairman and Chief Executive Officer |
|
|
|
|
By: |
/s/ Stephen C. Markowski |
|
|
|
|
|
Stephen C. Markowski |
|
Vice President of Finance, Chief Accounting Officer and
Acting Chief Financial Officer |
Date: February 7, 2006
70
Exhibit Index
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
10 |
.01* |
|
Form of FY06 Executive Annual Incentive Plan |
|
|
10 |
.02* |
|
Form of FY06 Executive Supplemental Annual Incentive Plan |
|
|
31 |
.01 |
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31 |
.02 |
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
32 |
.01** |
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
32 |
.02** |
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
* |
Management contract or compensatory plan or arrangement. |
|
|
** |
This exhibit is being furnished rather than filed, and shall not
be deemed incorporated by reference into any filing, in
accordance with Item 601 of
Regulation S-K.
|
|
|
|
|
|
Filed with initial filing of the
Form 10-Q on
November 9, 2005. |