GEN

Business Context and Reporting Period

This Form 10-Q covers Symantec Corporation (not Gen Digital Inc.) for the quarterly period ended September 28, 2001 (fiscal 2002 Q2). Symantec is a global provider of Internet security technology, including virus protection, firewalls, and intrusion detection. The company operates five segments: Enterprise Security, Enterprise Administration, Consumer Products, Services, and Other. The reporting period reflects a 52/53-week fiscal year.

Key Financial Metrics

Debt and Liquidity: Long-term obligations were $2.4 million. Cash and cash equivalents decreased by $85.6 million from the prior fiscal year-end, primarily due to stock repurchases and capital expenditures. The company holds $95.9 million in restricted investments for lease collateral.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 26% year-over-year for the quarter and 23% for the six-month period. Growth was driven by the Enterprise Security segment (up significantly due to AXENT acquisition) and partially offset by declines in Enterprise Administration and Consumer Products.
• Profitability Decline: Despite revenue growth, the company reported a net loss of $11.8 million for the quarter compared to a net income of $39.1 million in the prior year quarter. This was primarily due to a massive increase in amortization of goodwill ($49.4 million vs. $5.2 million) and other intangibles resulting from the AXENT acquisition.
• Expense Increases: Operating expenses rose 72% year-over-year. Research and Development increased 39%, and Sales and Marketing increased 38%, largely due to AXENT integration costs and hiring.
• Segment Performance: Enterprise Security revenue grew to $110.7 million (46% of total), while Consumer Products revenue declined to $74.9 million (31% of total) due to weak consumer spending.

Guidance, Outlook, and Risks

• Subsequent Financing: On October 24, 2001, Symantec completed a private offering of $600 million in 3% convertible subordinated notes due in 2006. Net proceeds were approximately $585 million.
• Lease Covenants: The issuance of the convertible notes may cause the company to be out of compliance with financial covenants in certain lease agreements. Management has requested amendments to these leases and expects them to be effective by the end of the December 2001 quarter.
• Accounting Changes: The company will adopt SFAS No. 142 in fiscal 2003, which will discontinue goodwill amortization and replace it with annual impairment tests. This is expected to increase reported earnings by approximately $200 million in fiscal 2003, excluding potential impairment charges.
• Risks: Key risks include the complexity of integrating the AXENT acquisition, potential disruptions from the transition to new Oracle-based information systems, patent infringement litigation (including cases with Altiris and Hilgraeve), and the impact of the September 11, 2001 terrorist attacks on the economic environment.

Investor Verification Checklist

• Goodwill Amortization Impact: Verify the extent to which the reported net loss is driven by non-cash goodwill amortization charges related to the AXENT acquisition versus operational performance.
• Lease Covenant Compliance: Confirm the status of the requested amendments to lease agreements to ensure no default occurs following the convertible note issuance.
• AXENT Integration: Assess the progress of integrating AXENT operations and whether the anticipated revenue synergies are materializing against the increased operating costs.
• Consumer Segment Trends: Monitor the decline in Consumer Products revenue to determine if it is a temporary market fluctuation or a structural shift in demand.
• Legal Contingencies: Review the status of pending patent litigation (Altiris, Hilgraeve, PowerQuest) and the potential for material settlements or judgments.