GEN

Business Context and Reporting Period

This Form 10-Q covers Symantec Corporation for the quarterly period ended June 30, 1996. Symantec develops, markets, and supports application and system software products for individual and workgroup productivity and networked computing environments. The company operates globally with offices in the U.S., Canada, Asia, Australia, Europe, and Latin America. On May 28, 1996, Symantec completed the acquisition of Fast Track, Inc., accounted for as a pooling of interests.

Key Financial Metrics

Liquidity: The company maintains a $10.0 million bank line of credit expiring in March 1998. There were no borrowings outstanding under this line as of June 30, 1996, though $0.4 million in standby letters of credit were outstanding.

Material Changes vs. Prior Period

• Revenue: Net revenues decreased slightly by 0.6% year-over-year. This was driven by a reduction in distribution and international revenues, partially offset by growth in site license and consulting revenues. International revenue declined largely due to the recognition of $7.2 million in previously deferred revenues in the prior year related to the Central Point acquisition.
• Profitability: Operating income fell 63% to $2.4 million, and net income dropped 56% to $3.0 million. This decline was primarily due to increased operating expenses.
• Expenses:
  • R&D: Increased 15% to $23.0 million due to development efforts for desktop and enterprise software.
  • Sales & Marketing: Increased 3% to $53.8 million due to added personnel.
  • G&A: Decreased 20% to $7.3 million following the elimination of duplicative functions after the Delrina acquisition.
  • Acquisition/Restructuring: Expenses of $1.3 million were recorded in Q2 1996 (compared to a benefit of $0.1 million in Q2 1995), including $0.6 million for the Fast Track acquisition and $0.7 million for centralization and litigation costs.

Outlook, Risks, and Management Commentary

• Future Costs: On July 9, 1996, Symantec announced a plan to consolidate operational and R&D activities, expecting to incur $3.0 million to $7.0 million in costs during the September 1996 quarter.
• Market Risks: The company faces significant volatility due to the market's adoption of Microsoft Windows 95 and Windows NT. Delays in product development for these platforms or a shift in customer spending from software to hardware could materially adversely affect results.
• Channel Dynamics: Revenue is susceptible to "channel fill" phenomena where distributors stock up on new products, followed by a decline in purchases. The company notes that enterprise product sales often occur late in the quarter, increasing forecasting uncertainty.
• Legal Proceedings: Symantec is defending a class action lawsuit filed in March 1996 alleging insider trading and stock price inflation. Additionally, the company is involved in ongoing litigation with Borland International regarding trade secrets and with EKD Computer Sales regarding copyright infringement. Management believes these claims lack merit but notes that unfavorable resolutions could impact future results.

Investor Verification Checklist

• Verify the impact of the announced $3.0–$7.0 million restructuring costs on the upcoming September 1996 quarter.
• Monitor the status of the class action lawsuit filed by Milberg Weiss Bershad Hynes & Lerach regarding alleged insider trading.
• Assess the adoption rate of Windows 95 and Windows NT and its correlation to Symantec's product release schedule and revenue recognition.
• Review the "channel fill" metrics and distributor inventory levels to gauge the sustainability of revenue trends.
• Confirm the integration progress and cost synergies from the Fast Track and Delrina acquisitions.