e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended
June 29, 2007
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
from to
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Commission File Number
000-17781
Symantec Corporation
(Exact name of the registrant as
specified in its charter)
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Delaware
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77-0181864
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. employer
identification no.)
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20330 Stevens Creek Blvd.,
Cupertino, California
(Address of principal
executive offices)
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95014-2132
(Zip Code)
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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 a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
Filer o Non-accelerated
filer 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, $0.01 par value per share,
outstanding as of July 27, 2007: 882,521,613 shares.
SYMANTEC
CORPORATION
FORM 10-Q
Quarterly
Period Ended June 30, 2007
TABLE OF
CONTENTS
2
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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SYMANTEC
CORPORATION
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June 30,
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March 31,
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2007
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2007
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(Unaudited)
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(In thousands, except par value)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,374,049
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$
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2,559,034
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Short-term investments
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660,543
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428,619
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Trade accounts receivable, net
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568,721
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666,968
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Inventories
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34,666
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42,183
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Deferred income taxes
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163,146
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165,323
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Other current assets
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279,828
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208,920
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Total current assets
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3,080,953
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4,071,047
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Property and equipment, net
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1,113,315
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1,092,240
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Acquired product rights, net
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925,595
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909,878
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Other intangible assets, net
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1,411,713
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1,245,638
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Goodwill
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10,969,774
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10,340,348
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Other long-term assets
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62,959
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63,987
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Non-current deferred income taxes
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57,300
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27,732
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Total assets
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$
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17,621,609
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$
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17,750,870
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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165,715
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$
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149,131
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Accrued compensation and benefits
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307,202
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307,824
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Current deferred revenue
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2,330,411
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2,387,733
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Income taxes payable
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13,056
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238,486
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Other accrued expenses
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224,416
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234,915
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Total current liabilities
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3,040,800
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3,318,089
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Convertible senior notes
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2,100,000
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2,100,000
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Long-term deferred revenue
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334,364
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366,050
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Non-current deferred tax
liabilities
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358,010
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343,848
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Long-term income taxes payable
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414,322
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Other long-term obligations
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38,647
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21,370
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Total liabilities
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6,286,143
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6,149,357
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Commitments and contingencies
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Stockholders equity:
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Preferred stock (par value: $0.01,
1,000 shares authorized; none issued and outstanding)
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Common stock (par value: $0.01,
3,000,000 shares authorized; 1,264,979 and
1,283,113 shares issued at June 30, 2007 and
March 31, 2007; 881,328 and 899,417 shares outstanding
at June 30, 2007 and March 31, 2007)
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8,813
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8,994
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Capital in excess of par value
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9,740,361
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10,061,144
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Accumulated other comprehensive
income
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189,725
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182,933
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Retained earnings
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1,396,567
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1,348,442
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Total stockholders equity
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11,335,466
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11,601,513
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Total liabilities and
stockholders equity
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$
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17,621,609
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$
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17,750,870
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The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these financial statements.
3
SYMANTEC
CORPORATION
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Three Months Ended
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June 30,
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2007
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2006
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(Unaudited)
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(In thousands, except net income per share data)
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Net revenues:
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Content, subscriptions, and
maintenance
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$
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1,086,518
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$
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917,546
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Licenses
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313,820
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348,322
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Total net revenues
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1,400,338
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1,265,868
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Cost of revenues:
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Content, subscriptions, and
maintenance
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209,666
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195,136
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Licenses
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11,238
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15,912
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Amortization of acquired product
rights
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89,360
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87,611
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Total cost of revenues
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310,264
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298,659
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Gross profit
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1,090,074
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967,209
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Operating expenses:
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Sales and marketing
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568,530
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467,449
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Research and development
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225,578
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213,195
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General and administrative
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85,845
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78,621
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Amortization of other purchased
intangible assets
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56,925
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50,614
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Restructuring
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19,000
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13,258
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Total operating expenses
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955,878
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823,137
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Operating income
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134,196
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144,072
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Interest income
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20,821
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27,816
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Interest expense
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(6,291
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(6,678
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Other income (expense), net
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1,266
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(182
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Income before income taxes
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149,992
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165,028
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Provision for income taxes
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54,786
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64,494
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Net income
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$
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95,206
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$
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100,534
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Net income per share
basic
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0.11
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0.10
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Net income per share
diluted
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0.10
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0.10
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Shares used to compute net income
per share basic
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891,642
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1,028,820
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Shares used to compute net income
per share diluted
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910,302
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1,048,833
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The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these financial statements.
4
SYMANTEC
CORPORATION
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Three Months
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Ended June 30,
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2007
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2006
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(Unaudited)
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(In thousands)
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OPERATING
ACTIVITIES:
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Net income
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$
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95,206
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$
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100,534
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Adjustments to reconcile net
income to net cash provided by operating activities:
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Depreciation and amortization of
property and equipment
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66,655
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63,522
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Amortization
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146,790
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143,354
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Stock-based compensation expense
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40,743
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36,859
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Impairment of equity investments
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2,841
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Deferred income taxes
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(25,119
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)
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(37,333
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)
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Income tax benefit from stock
options
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9,863
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5,138
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Excess income tax benefit from
stock options
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(9,044
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)
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(1,893
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Other
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(260
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)
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(500
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)
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Net change in assets and
liabilities, excluding effects of acquisitions:
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Trade accounts receivable, net
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141,391
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144,066
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Inventories
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7,706
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8,470
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Accounts payable
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12,682
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(16,751
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Accrued compensation and benefits
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(16,480
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)
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(22,840
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Deferred revenue
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(110,004
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)
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(4,006
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)
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Income taxes payable
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19,392
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(60,085
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Other operating assets and
liabilities
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(28,212
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)
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6,864
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Net cash provided by operating
activities
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351,309
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368,240
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INVESTING
ACTIVITIES:
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Capital expenditures
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(74,688
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(147,074
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Proceeds from sale of property and
equipment
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903
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Cash payments for business
acquisitions, net of cash and cash equivalents acquired
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(840,568
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)
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(1,646
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)
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Purchases of available-for-sale
securities
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(300,531
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)
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(12,683
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Proceeds from sales of
available-for-sale securities
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103,611
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147,265
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Net cash used in investing
activities
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(1,111,273
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(14,138
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FINANCING
ACTIVITIES:
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Issuance of convertible senior
notes
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2,067,762
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Purchase of hedge on convertible
senior notes
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(592,490
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Sale of common stock warrants
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326,102
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Repurchase of common stock
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(499,995
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)
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(891,360
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Net proceeds from sales of common
stock under employee stock benefit plans
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62,163
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40,481
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Repayment of long term liability
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(5,333
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)
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Restricted stock issuance
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(2,939
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)
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Excess tax benefit from stock
options
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9,044
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1,893
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Net cash (used in) provided by
financing activities
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(437,060
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)
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952,388
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Effect of exchange rate
fluctuations on cash and cash equivalents
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12,039
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63,405
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Increase (decrease) in cash and
cash equivalents
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(1,184,985
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)
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1,369,895
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Beginning cash and cash equivalents
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2,559,034
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2,315,622
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Ending cash and cash equivalents
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$
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1,374,049
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$
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3,685,517
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The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these financial statements.
5
SYMANTEC
CORPORATION
(Unaudited)
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Note 1.
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Basis of
Presentation
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The condensed consolidated financial statements of Symantec
Corporation (we, us, and our
refer to Symantec Corporation and all of its subsidiaries) as of
June 30, 2007 and March 31, 2007 and for the
three-month periods ended June 30, 2007 and 2006 have been
prepared in accordance with the instructions for
Form 10-Q
pursuant to the rules and regulations of the Securities and
Exchange Commission, or SEC, and, therefore, do not include all
information and notes normally provided in audited financial
statements. In the opinion of management, the condensed
consolidated financial statements contain all adjustments,
consisting only of normal recurring items, except as otherwise
noted, necessary for the fair presentation of our financial
position and results of operations for the interim periods. The
condensed consolidated balance sheet at March 31, 2007 has
been derived from the audited consolidated financial statements,
but it does not include all disclosures required by generally
accepted accounting principles. These condensed consolidated
financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in
our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2007. The results of
operations for the three-month period ended June 30, 2007
are not necessarily indicative of the results to be expected for
the entire fiscal year. All significant intercompany accounts
and transactions have been eliminated. Certain previously
reported amounts have been reclassified to conform to the
current presentation, primarily relating to changes in our
segments as discussed in Note 13.
We have a 52/53-week fiscal accounting year. Accordingly, all
references as of and for the periods ended June 30, 2007,
March 31, 2007, and June 30, 2006 reflect amounts as
of and for the periods ended June 29, 2007, March 30,
2007, and June 30, 2006, respectively. The three-month
periods ended June 30, 2007 and 2006 each comprised
13 weeks of activity.
Significant
accounting policies
On April 1, 2007, we adopted Financial Accounting Standards
Board, or FASB Interpretation No. 48, or FIN 48,
Accounting for Uncertainty in Income Taxes, as discussed
more fully below. Other than this change, there have been no
significant changes in our significant accounting policies
during the three months ended June 30, 2007 as compared to
the significant accounting policies described in our Annual
Report on
Form 10-K
for the fiscal year ended March 31, 2007.
Income
Taxes
We adopted the provisions of FIN 48 effective April 1,
2007. FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
FIN 48 prescribes a two-step process to determine the
amount of tax benefit to be recognized. The first step is to
evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any.
The second step requires us to estimate and measure the tax
benefit as the largest amount that is more than 50% likely of
being realized upon ultimate settlement. It is inherently
difficult and subjective to estimate such amounts, as this
requires us to determine the probability of various possible
outcomes. We reevaluate these uncertain tax positions on a
quarterly basis. This evaluation is based on factors including,
but not limited to, changes in facts or circumstances, changes
in tax law, effectively settled issues under audit, and new
audit activity. Such a change in recognition or measurement
would result in the recognition of a tax benefit or an
additional charge to the tax provision in the period.
6
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
accounting pronouncements
In February 2007, the FASB, issued Statement of Financial
Accounting Standards, or SFAS, No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, including
an amendment of SFAS No. 115.
SFAS No. 159 permits companies to choose to
measure certain financial instruments and certain other items at
fair value and requires unrealized gains and losses on items for
which the fair value option has been elected to be reported in
earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We are currently in the
process of evaluating the impact of SFAS No. 159 on
our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
establishes a framework for measuring the fair value of assets
and liabilities. This framework is intended to provide increased
consistency in how fair value determinations are made under
various existing accounting standards which permit, or in some
cases require, estimates of fair market value.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those
fiscal years. Earlier application is encouraged, provided that
the reporting entity has not yet issued financial statements for
that fiscal year, including any financial statements for an
interim period within that fiscal year. We are currently in the
process of evaluating the impact of SFAS No. 157 on
our consolidated financial statements.
In September 2006, the FASB issued Emerging Issues Task Force
Issue, or EITF,
No. 06-1,
Accounting for Consideration Given by a Service Provider to a
Manufacturer or Reseller of Equipment Necessary for an
End-Customer to Receive Service from the Service Provider.
EITF
No. 06-1
requires that we provide disclosures regarding the nature of
arrangements in which we provide consideration to manufacturers
or resellers of equipment necessary for an end-customer to
receive service from us, including the amounts recognized in the
Consolidated Statements of Income. EITF
No. 06-1
is effective for fiscal years beginning after June 15,
2007. We do not expect the adoption of EITF
No. 06-1
to have a material impact on our consolidated financial
statements.
In March 2006, the FASB issued Emerging Issues Task Force Issue
06-03 How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the
Income Statement (EITF
06-03).
Pursuant to this issue we elected to present taxes collected
from customers and remitted to governmental authorities net in
our financial statements. This treatment is consistent with our
historical presentation. EITF 06-03 is effective for interim and
annual reporting periods beginning after December 15, 2006,
with earlier application permitted. We do not expect the
adoption of EITF 06-03 to have any impact on our consolidated
financial statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments,
which amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 155 simplifies the
accounting for certain derivatives embedded in other financial
instruments by allowing them to be accounted for as a whole, if
the holder elects to account for the entire instrument on a fair
value basis. SFAS No. 155 also clarifies and amends
certain other provisions of SFAS No. 133 and
SFAS No. 140. SFAS No. 155 is effective for
all financial instruments acquired, issued, or subject to a
re-measurement event occurring in fiscal years beginning after
September 15, 2006. Earlier adoption is permitted, provided
the company has not yet issued financial statements, including
for interim periods, for that fiscal year. We do not expect the
adoption of SFAS No. 155 to have a material impact on
our consolidated financial statements.
7
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 2.
|
Balance
Sheet Information
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Trade accounts receivable,
net:
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
591,511
|
|
|
$
|
687,580
|
|
Less: allowance for doubtful
accounts
|
|
|
(12,044
|
)
|
|
|
(8,391
|
)
|
Less: reserve for product returns
|
|
|
(10,746
|
)
|
|
|
(12,221
|
)
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net:
|
|
$
|
568,721
|
|
|
$
|
666,968
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net:
|
|
|
|
|
|
|
|
|
Computer hardware and software
|
|
$
|
888,677
|
|
|
$
|
842,691
|
|
Office furniture and equipment
|
|
|
290,480
|
|
|
|
282,838
|
|
Buildings
|
|
|
559,983
|
|
|
|
533,319
|
|
Leasehold improvements
|
|
|
246,998
|
|
|
|
237,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,986,138
|
|
|
|
1,896,691
|
|
Less: accumulated depreciation and
amortization
|
|
|
(985,844
|
)
|
|
|
(917,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,294
|
|
|
|
979,334
|
|
Land
|
|
|
113,021
|
|
|
|
112,906
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net:
|
|
$
|
1,113,315
|
|
|
$
|
1,092,240
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
Comprehensive
Income
|
The components of comprehensive income, net of tax, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
95,206
|
|
|
$
|
100,534
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss)
on available-for-sale securities, net of tax
|
|
|
(1,302
|
)
|
|
|
1,777
|
|
Change in cumulative translation
adjustment, net of tax
|
|
|
8,094
|
|
|
|
24,064
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
6,792
|
|
|
|
25,841
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
101,998
|
|
|
$
|
126,375
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income as of June 30, 2007
and 2006 consists primarily of foreign currency translation
adjustments, net of taxes. Unrealized gains and losses on
available-for-sale investments, net of taxes, were immaterial
for all periods presented.
8
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4.
|
Business
Combinations
|
Company-i
On December 1, 2006, we completed our acquisition of
Company-i Limited, or Company-i, a UK-based professional
services firm that specialized in addressing key challenges
associated with operating and managing a data center in the
financial services industry, for $26 million in cash,
including an immaterial amount for acquisition related expenses.
The aggregate purchase price was allocated as follows, based on
the currency exchange rate on the date of acquisition: goodwill,
$22 million; other intangible assets, $6 million; net
deferred tax liabilities, $2 million; and an immaterial
amount to net tangible assets. Goodwill resulted primarily from
our expectation of synergies from the integration of
Company-is service offerings with our service offerings.
The amount allocated to Other intangible assets is being
amortized to Operating expenses in the Condensed Consolidated
Statements of Income over its estimated useful life of eight
years. The results of operations of Company-i have been included
in our results of operations since its acquisition date. The
financial results of this acquisition are considered immaterial
for purposes of pro forma financial disclosures. Company-i is
included in our Services segment. Goodwill is not deductible for
tax purposes.
In addition, the purchase price was subject to an adjustment of
up to $11 million in cash if Company-i achieved certain
billings targets by March 31 or September 30, 2007, or
September 30, 2008. During the June quarter, we determined
that the billing targets were met as of June 29, 2007 and
therefore recorded a liability of approximately
$12 million, including the effects of foreign exchange and
booked an adjustment to goodwill, in accordance with
SFAS No. 141, Business Combinations.
Altiris
On April 6, 2007, we completed our acquisition of 100% of
the equity interest of Altiris Inc., or Altiris, a leading
provider of information technology management software that
enables businesses to easily manage and service network-based
endpoints. The aggregate purchase price, including acquisition
related costs, was approximately $1,045 million, of which
approximately $841 million was paid in cash, which amount
was net of Altiris cash and cash equivalents balance. We
believe this acquisition will enable us to help customers better
manage and enforce security policies at the endpoint, identify
and protect against threats, and repair and service assets. The
aggregate purchase price was preliminarily allocated as follows:
goodwill, $633 million; other intangible assets,
$223 million; net income tax liabilities,
$139 million; developed technology, $90 million; and
net tangible assets, $238 million. Goodwill resulted
primarily from our expectation of synergies from the integration
of Altiris service offerings with our service offerings.
The amount allocated to Developed technology is being amortized
to Cost of revenues in the Condensed Consolidated Statements of
Income over its estimated useful life of one to six years. The
amount allocated to Other intangible assets is being amortized
to Operating expenses in the Condensed Consolidated Statements
of Income over its estimated useful life of three to eight
years. The results of operations of Altiris have been included
in our results of operations since its acquisition date. The
financial results of this acquisition are considered immaterial
for purposes of pro forma financial disclosures. Altiris is
included in the new Altiris segment. Goodwill is not deductible
for tax purposes.
Huawei
Technologies Joint Venture
In May 2007, we signed an agreement to form a joint venture with
Huawei Technologies Co., Ltd., or the joint venture. The joint
venture will develop, manufacture, market and support security
and storage appliances to global telecommunications carriers and
enterprise customers. We will contribute storage and security
software and $150 million in cash in return for a 49%
interest in the joint venture. The joint venture is expected to
close late in calendar year 2007, pending required regulatory
and governmental approvals.
9
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5.
|
Goodwill,
Acquired Product Rights, and Other Intangible Assets
|
Goodwill
In accordance with SFAS No. 142, we allocate goodwill
to our reporting units, which are the same as our operating
segments. Goodwill is allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Data
|
|
|
Data Center
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Products
|
|
|
Management(a)
|
|
|
Management
|
|
|
Services(a)
|
|
|
Altiris(a)
|
|
|
Company
|
|
|
|
(In thousands)
|
|
|
Balance as of March 31, 2007
|
|
$
|
102,810
|
|
|
$
|
4,169,684
|
|
|
$
|
5,400,718
|
|
|
$
|
346,391
|
|
|
$
|
320,745
|
|
|
$
|
10,340,348
|
|
Goodwill acquired through business
combination(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,705
|
|
|
|
633,233
|
|
|
|
644,938
|
|
Goodwill adjustments(c)
|
|
|
|
|
|
|
(10,940
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,572
|
)
|
|
|
(15,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2007
|
|
$
|
102,810
|
|
|
$
|
4,158,744
|
|
|
$
|
5,400,718
|
|
|
$
|
358,096
|
|
|
$
|
949,406
|
|
|
$
|
10,969,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In the June 2007 quarter, we revised our segment reporting
structure, as discussed in Note 13. As a result of this
revision, we have recast our prior year Goodwill balances for
the Security and Data Management, Services, and Altiris segments
to reflect the current reporting structure. |
|
(b) |
|
Reflects adjustments made to goodwill acquired through business
combinations of approximately $12 million, including the
effects of foreign exchange, for Company-i and approximately
$633 million for Altiris. See Note 4 for further
details. |
|
(c) |
|
On April 1, 2007, we adjusted the Security and Data
Management Goodwill balance related to a prior acquisition as a
result of the adoption of FIN 48. During the June 2007
quarter, we adjusted the Goodwill balance associated with the
Altiris acquisition as a result of tax adjustments related to
stock based compensation. |
Goodwill is tested for impairment on an annual basis during the
March quarter, or earlier if indicators of impairment exist.
Based on our review at June 30, 2007, no indicators of
impairment existed.
Acquired
product rights, net
Acquired product rights, net subject to amortization are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Developed technology
|
|
$
|
1,722,216
|
|
|
$
|
(841,821
|
)
|
|
$
|
880,395
|
|
Patents
|
|
|
72,676
|
|
|
|
(27,476
|
)
|
|
|
45,200
|
|
Backlog and other
|
|
|
60,661
|
|
|
|
(60,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,855,553
|
|
|
$
|
(929,958
|
)
|
|
$
|
925,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Developed technology
|
|
$
|
1,610,199
|
|
|
$
|
(754,328
|
)
|
|
$
|
855,871
|
|
Patents
|
|
|
79,684
|
|
|
|
(25,677
|
)
|
|
|
54,007
|
|
Backlog and other
|
|
|
60,661
|
|
|
|
(60,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,750,544
|
|
|
$
|
(840,666
|
)
|
|
$
|
909,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for acquired product rights was
$89 million and $88 million for the three-month
periods ended June 30, 2007 and 2006, respectively.
Amortization of acquired product rights is included in Cost of
revenues in the Condensed Consolidated Statements of Income. The
weighted-average remaining estimated lives of acquired product
rights are approximately three years for developed technology
and approximately four years for patents. The weighted-average
remaining estimated life of acquired product rights is
approximately three years. Amortization expense for acquired
product rights, based upon our existing acquired product rights
and their current useful lives as of June 30, 2007, is
estimated to be as follows (in thousands):
|
|
|
|
|
Last three quarters of fiscal 2008
|
|
$
|
287,575
|
|
2009
|
|
|
348,875
|
|
2010
|
|
|
196,194
|
|
2011
|
|
|
60,431
|
|
2012
|
|
|
21,072
|
|
Thereafter
|
|
|
11,448
|
|
|
|
|
|
|
Total
|
|
$
|
925,595
|
|
|
|
|
|
|
On June 20, 2007, we and Peter Norton amended the Amended
Agreement Respecting Certain Rights of Publicity dated
August 31, 1990, concerning Symantecs license to
Peter Nortons publicity rights. The amendment replaced the
royalty payments previously paid to Mr. Norton, based on
certain product sales, with fixed monthly payments totaling
$33 million through 2016 and made other conforming changes.
As a result of this amendment, we recorded a long-term liability
for the net present value of the payments of $29 million,
an indefinite-lived intangible asset of $22 million
included in Developed technology above, and a reduction of
accrued royalties of $7 million for accrued royalties
forgiven as part of the amendment. The indefinite-lived
intangible asset will not be amortized and will be tested for
impairment in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets (as amended).
11
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
intangible assets, net
Other intangible assets, net subject to amortization are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Customer base
|
|
$
|
1,700,901
|
|
|
$
|
(388,851
|
)
|
|
$
|
1,312,050
|
|
Trade name
|
|
|
129,507
|
|
|
|
(30,515
|
)
|
|
|
98,992
|
|
Marketing-related assets
|
|
|
2,100
|
|
|
|
(2,100
|
)
|
|
|
|
|
Partnership agreements
|
|
|
2,300
|
|
|
|
(1,629
|
)
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,834,808
|
|
|
$
|
(423,095
|
)
|
|
$
|
1,411,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Customer base
|
|
$
|
1,500,201
|
|
|
$
|
(335,393
|
)
|
|
$
|
1,164,808
|
|
Trade name
|
|
|
107,207
|
|
|
|
(27,335
|
)
|
|
|
79,872
|
|
Marketing-related assets
|
|
|
2,100
|
|
|
|
(2,100
|
)
|
|
|
|
|
Partnership agreements
|
|
|
2,300
|
|
|
|
(1,342
|
)
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,611,808
|
|
|
$
|
(366,170
|
)
|
|
$
|
1,245,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for other intangible assets was
$57 million and $51 million for the three-month
periods ended June 30, 2007 and 2006, respectively.
Amortization of other intangible assets is included in Operating
expenses in the Condensed Consolidated Statements of Income. The
weighted-average remaining estimated lives for other intangible
assets are approximately six years for customer base,
approximately eight years for trade name, and approximately one
year for partnership agreements. The weighted-average remaining
estimated life of other intangible assets is approximately six
years. Amortization expense for other intangible assets, based
upon our existing other intangible assets and their current
useful lives as of June 30, 2007, is estimated to be as
follows (in thousands):
|
|
|
|
|
Last three quarters of fiscal 2008
|
|
$
|
170,518
|
|
2009
|
|
|
226,256
|
|
2010
|
|
|
224,627
|
|
2011
|
|
|
223,888
|
|
2012
|
|
|
221,837
|
|
Thereafter
|
|
|
344,587
|
|
|
|
|
|
|
Total
|
|
$
|
1,411,713
|
|
|
|
|
|
|
Convertible
senior notes
In June 2006, we issued $1.1 billion principal amount of
0.75% Convertible Senior Notes due June 15, 2011, or
the 0.75% Notes, and $1.0 billion principal amount of
1.00% Convertible Senior Notes due June 15, 2013, or
the 1.00% Notes, to initial purchasers in a private
offering for resale to qualified institutional buyers pursuant
to SEC
12
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rule 144A. We refer to the 0.75% Notes and the
1.00% Notes collectively as the Senior Notes. We received
proceeds of $2.1 billion from the Senior Notes and incurred
net transaction costs of approximately $33 million, which
were allocated proportionately to the 0.75% Notes and the
1.00% Notes. The transaction costs were primarily recorded
in Other long-term assets and are being amortized to interest
expense using the effective interest method over five years for
the 0.75% Notes and seven years for the 1.00% Notes.
The 0.75% Notes and 1.00% Notes were each issued at
par and bear interest at 0.75% and 1.00% per annum,
respectively. Interest is payable semiannually in arrears on
June 15 and December 15, beginning December 15, 2006.
Each $1,000 of principal of the Senior Notes will initially be
convertible into 52.2951 shares of Symantec common stock,
which is the equivalent of $19.12 per share, subject to
adjustment upon the occurrence of specified events. Holders of
the Senior Notes may convert their Senior Notes prior to
maturity during specified periods as follows: (1) during
any calendar quarter beginning after June 30, 2006, if the
closing price of our common stock for at least 20 trading days
in the 30 consecutive trading days ending on the last trading
day of the immediately preceding calendar quarter is more than
130% of the applicable conversion price per share; (2) if
specified corporate transactions, including a change in control,
occur; (3) with respect to the 0.75% Notes, at any
time on or after April 5, 2011, and with respect to the
1.00% Notes, at any time on or after April 5, 2013; or
(4) during the five
business-day
period after any five consecutive
trading-day
period during which the trading price of the Senior Notes falls
below a certain threshold. Upon conversion, we would pay the
holder the cash value of the applicable number of shares of
Symantec common stock, 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 our option. Holders who convert their
Senior Notes in connection with a change in control may be
entitled to a make whole premium in the form of an
increase in the conversion rate. As of June 30, 2007, none
of the conditions allowing holders of the Senior Notes to
convert had been met. In addition, upon a change in control of
Symantec, the holders of the Senior Notes may require us to
repurchase for cash all or any portion of their Senior Notes for
100% of the principal amount.
Under the terms of the Senior Notes, we were required to use
reasonable efforts to file a shelf registration statement
regarding the Senior Notes with the SEC and cause the shelf
registration statement to be declared effective within
180 days of the closing of the offering of the Senior
Notes. In addition, we must maintain the effectiveness of the
shelf registration statement for a period of two years after the
closing of the offering of the Senior Notes. If we fail to meet
these terms, we will be required to pay additional interest on
the Senior Notes in the amount of 0.25% per annum. We have filed
the shelf registration statement with the SEC and it became
effective on December 11, 2006.
Concurrently with the issuance of the Senior Notes, we entered
into note hedge transactions with affiliates of certain of the
initial purchasers whereby we have the option to purchase up to
110 million shares of our common stock at a price of $19.12
per share. The options as to 58 million shares expire on
June 15, 2011 and the options as to 52 million shares
expire on June 15, 2013. The options must be settled in net
shares. The cost of the note hedge transactions to us was
approximately $592 million. In addition, we sold warrants
to affiliates of certain of the initial purchasers whereby they
have the option to purchase up to 110 million shares of our
common stock at a price of $27.3175 per share. The warrants
expire on various dates from July 2011 through August 2013 and
must be settled in net shares. We received approximately
$326 million in cash proceeds from the sale of these
warrants.
The cost incurred in connection with the note hedge
transactions, net of the related tax benefit and the proceeds
from the sale of the warrants, is included as a net reduction in
Capital in excess of par value in the accompanying Consolidated
Balance Sheet as of June 30, 2007, in accordance with the
guidance in Emerging Issues Task Force, or EITF,
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock.
In accordance with SFAS No. 128, Earnings per
Share, the Senior Notes will have no impact on diluted
earnings per share until the price of our common stock exceeds
the conversion price of $19.12 per share because the principal
amount of the Senior Notes will be settled in cash upon
conversion. Prior to conversion we will include the effect of
the additional shares that may be issued if our common stock
price exceeds $19.12 per share using the
13
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
treasury stock method. As a result, for the first $1.00 by which
the price of our common stock exceeds $19.12 per share there
would be dilution of approximately 5.4 million shares. As
the share price continues to increase, additional dilution would
occur at a declining rate such that a price of $27.3175 per
share would yield cumulative dilution of approximately
32.9 million shares. If our common stock exceeds $27.3175
per share we will also include the effect of the additional
potential shares that may be issued related to the warrants
using the treasury stock method. The Senior Notes along with the
warrants have a combined dilutive effect such that for the first
$1.00 by which the price exceeds $27.3175 per share there would
be cumulative dilution of approximately 39.5 million shares
prior to conversion. As the share price continues to increase,
additional dilution would occur but at a declining rate.
Prior to conversion, the note hedge transactions are not
considered for purposes of the earnings per share, or EPS,
calculation as their effect would be anti-dilutive. Upon
conversion, the note hedge will automatically serve to
neutralize the dilutive effect of the Senior Notes when the
stock price is above $19.12 per share. For example, if upon
conversion the price of our common stock was $28.3175 per share,
the cumulative effect of approximately 39.5 million shares
in the example above would be reduced to approximately
3.9 million shares.
The preceding calculations assume that the average price of our
common stock exceeds the respective conversion prices during the
period for which EPS is calculated and exclude any potential
adjustments to the conversion ratio provided under the terms of
the Senior Notes. See Note 10 for information regarding the
impact on EPS of the Senior Notes and warrants in the current
period.
Line
of credit
In July 2006, we entered into a five-year $1 billion senior
unsecured revolving credit facility that expires in July 2011.
Borrowings under the facility bear interest, at our option, at
either a rate equal to the banks base rate or a rate equal
to LIBOR plus a margin based on our leverage ratio, as defined
in the credit facility agreement. In connection with the credit
facility, we must maintain certain covenants, including a
specified ratio of debt to earnings before interest, taxes,
depreciation, and amortization as defined, or EBITDA, as well as
various other non-financial covenants. No borrowings are
outstanding at June 30, 2007.
|
|
Note 7.
|
Stock
Transactions
|
Stock
repurchases
During the quarter ended June 30, 2007, we completed the
$1 billion share repurchase program announced in January
2007. In June 2007, we announced that our Board of Directors
authorized the repurchase of an additional $2 billion of
Symantec common stock. The repurchase authorization does not
have a scheduled expiration date.
During the three-month period ended June 30, 2007, we
repurchased 25 million shares of our common stock at prices
ranging from $19.40 to $20.14 per share for an aggregate amount
of $500 million. As of June 30, 2007, an aggregate of
$2 billion remained authorized for future repurchases under
our authorized stock repurchase programs.
|
|
Note 8.
|
Stock-Based
Compensation
|
We currently have in effect certain stock purchase plans, stock
award plans, and equity incentive plans, as described in detail
in Note 11 of Notes to Consolidated Financial Statements in
our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2007.
14
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Valuation
of stock-based awards
The fair value of each stock option granted under our equity
incentive plans is estimated on the date of grant using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Expected life
|
|
|
3 years
|
|
|
|
3 years
|
|
Expected volatility
|
|
|
0.33
|
|
|
|
0.34
|
|
Risk free interest rate
|
|
|
4.6
|
%
|
|
|
4.9
|
%
|
The expected life of options is based on an analysis of our
historical experience of employee exercise and post-vesting
termination behavior considered in relation to the contractual
life of the option. Expected volatility is based on the average
of the historical volatility for the period commensurate with
the expected life of the option and the implied volatility of
traded options. The risk free interest rate is equal to the
U.S. Treasury constant maturity rates for the period equal
to the expected life. We do not currently pay cash dividends on
our common stock and do not anticipate doing so in the
foreseeable future. Accordingly, our expected dividend yield is
zero. The fair value of each Restricted Stock Unit, or RSU, is
equal to the market value of Symantecs common stock on the
date of grant. The fair value of each Employee stock purchase
plan, or ESPP, purchase right granted from July 1, 2005
onwards is equal to the 15% discount on shares purchased. We
estimate forfeitures of options, RSUs, and ESPP purchase rights
at the time of grant based on historical experience and record
compensation expense only for those awards that are expected to
vest.
Stock-based
compensation expense
Stock-based compensation is classified in the Condensed
Consolidated Statements of Income in the same expense line items
as cash compensation. The following table sets forth the total
stock-based compensation expense recognized in our Condensed
Consolidated Statements of Income for the three-month periods
ended June 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
Content, subscriptions, and maintenance
|
|
$
|
3,411
|
|
|
$
|
2,862
|
|
Cost of revenues
Licenses
|
|
|
985
|
|
|
|
1,119
|
|
Sales and marketing
|
|
|
14,463
|
|
|
|
14,186
|
|
Research and development
|
|
|
14,166
|
|
|
|
14,098
|
|
General and administrative
|
|
|
7,718
|
|
|
|
4,594
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
40,743
|
|
|
|
36,859
|
|
Tax benefit associated with
stock-based compensation expense
|
|
|
9,228
|
|
|
|
7,402
|
|
|
|
|
|
|
|
|
|
|
Net effect of stock-based
compensation expense on net income
|
|
$
|
31,515
|
|
|
$
|
29,457
|
|
|
|
|
|
|
|
|
|
|
Net effect of stock-based
compensation expense on net income per share basic
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Net effect of stock-based
compensation expense on net income per share diluted
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007, total unrecognized compensation cost
related to unvested stock options, RSUs, and Restricted Stock
Agreements, or RSAs, was $201 million, $78 million,
and $4 million, respectively, which is
15
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expected to be recognized over the remaining weighted-average
vesting periods of 2.8 years for stock options,
2.1 years for RSUs, and 1 year for RSAs.
The weighted-average fair value per share of options granted
during the three months ended June 30, 2007 and 2006 was
$5.72 and $4.77, respectively. The total intrinsic value of
options exercised during the three months ended June 30,
2007 and 2006 was $61 million and $21 million,
respectively.
The weighted-average fair value per share of RSUs granted during
the three months ended June 30, 2007 and 2006 was $19.45
and $16.31, respectively. The total fair value of RSUs that
vested during the three months ended June 30, 2007 and 2006
was $12 million and an immaterial amount respectively.
Assumed
Altiris Stock Options and Awards
In connection with our acquisition of Altiris, we assumed all of
the outstanding options to purchase Altiris common stock. Each
option assumed was converted into an option to purchase Symantec
common stock after applying the exchange ratio of
1.9075 shares of Symantec common stock for each share of
Altiris common stock. In total, we assumed and converted Altiris
options into options to purchase approximately 3 million
shares of Symantec common stock. In addition, we assumed and
converted all outstanding Altiris RSUs into approximately
320,000 Symantec RSUs, based on the same exchange ratio.
Furthermore, we assumed all outstanding Altiris RSAs which were
converted into the right to receive cash of $33.00 per share
upon vesting. The total value of the assumed RSAs on the date of
acquisition was approximately $9 million, assuming no RSAs
are forfeited prior to vesting. The total unrecognized
compensation cost as of June 30, 2007 related to the
Altiris unvested stock options, RSUs and RSAs, was
$5 million, $3 million, and $4 million,
respectively.
The assumed options, RSUs, and RSAs retained all applicable
terms and vesting periods, except for certain options, RSAs and
RSUs that were accelerated according to the executive vesting
plan and will generally vest over a four to twelve month period
from the date of acquisition and certain other options that
vested in full as of the acquisition date. In general, the
assumed options typically vest over a period of three to four
years from the original date of grant and have a maximum term of
ten years. The assumed RSUs and RSAs typically vest over a
period of two to three years from the original date of grant.
As of June 30, 2007, we had a restructuring and employee
termination benefit reserve of $23 million, of which
$17 million was included in Other accrued expenses and
$6 million was included in Other long-term liabilities on
the Condensed Consolidated Balance Sheet. The restructuring
reserve consists of $16 million related to reserves
established for the fiscal year 2007 plans, $4 million
related to restructuring reserves established for the fiscal
2006 plan, and $3 million related to a restructuring
reserve assumed from the Veritas acquisition.
Restructuring
charges
In fiscal 2007, we implemented restructuring plans to better
align our expenses with our revenue expectations. The costs
included amounts for severance, associated benefits,
outplacement services, and termination of excess facilities. As
of March 31, 2007, $46 million remained related to
this reserve. In the June 2007 quarter we increased this reserve
by approximately $19 million and paid approximately
$49 million related to this reserve. As of June 30,
2007, $16 million remained in this reserve, which we expect
to be paid by the end of fiscal 2013.
In fiscal 2006, we recorded restructuring costs related to
severance, associated benefits, and outplacement services, and
related excess facilities. As of March 31, 2007,
$5 million remained related to this reserve, the majority
of which relates to excess facilities. During the June 2007
quarter, we paid an immaterial amount related to this reserve.
As of June 30, 2007, $4 million remained in this
reserve, which we expect to be paid by the end of fiscal 2018.
16
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts related to restructuring expense are included in
Restructuring on the Condensed Consolidated Statements of Income.
Acquisition-related
restructuring
In connection with the Veritas acquisition, we assumed a
restructuring reserve related to the 2002 Veritas facilities
restructuring plan. As of March 31, 2007, $4 million
remained related to this reserve. In the June 2007 quarter, we
paid an immaterial amount related to this reserve and increased
this reserve by an immaterial amount as we determined that the
costs related to certain facilities would be greater than
originally accrued. The remaining reserve amount of
$3 million will be paid over the remaining lease terms,
ending at various dates through 2015.
|
|
Note 10.
|
Net
Income Per Share
|
The components of net income per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands,
|
|
|
|
except per share data)
|
|
|
Net income per
share basic:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
95,206
|
|
|
$
|
100,534
|
|
Weighted average number of common
shares outstanding during the period
|
|
|
891,642
|
|
|
|
1,028,820
|
|
|
|
|
|
|
|
|
|
|
Net income per share
basic
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Net income per
share diluted:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
95,206
|
|
|
$
|
100,534
|
|
Weighted average number of common
shares outstanding during the period
|
|
|
891,642
|
|
|
|
1,028,820
|
|
Shares issuable from assumed
exercise of options using the treasury stock method
|
|
|
17,644
|
|
|
|
19,978
|
|
Dilutive impact of restricted
stock units using the treasury stock method
|
|
|
1,016
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Total shares for purposes of
calculating diluted net income per share diluted
|
|
|
910,302
|
|
|
|
1,048,833
|
|
|
|
|
|
|
|
|
|
|
Net income per share
diluted
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
The following potential common shares were excluded from the
computation of diluted net income per share as their effect
would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Stock options
|
|
|
61,055
|
|
|
|
82,565
|
|
Restricted stock units
|
|
|
19
|
|
|
|
2,406
|
|
For the three-month periods ended June 30, 2007 and 2006,
the effect of the warrants and Convertible note was excluded
because, as discussed in Note 6, they have no impact on
diluted net income per share until our average stock price for
the applicable period reaches $27.3175 per share.
The effective tax rate was approximately 36.5% and 39% for the
three-month periods ended June 30, 2007 and 2006. The
effective tax rate for both periods is impacted by the benefits
of lower-taxed foreign earnings and domestic manufacturing tax
incentives, offset by state income taxes and non-deductible
stock-based compensation
17
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
resulting from the adoption of SFAS No. 123R, Share-Based
Payment. The higher effective tax rate for the June 2006
quarter includes an accrual of approximately $6 million for
penalty risks associated with the late filing of Veritas
final pre-acquisition income tax return.
We adopted the provisions of FIN 48 effective April 1,
2007. FIN 48 addresses the accounting for and disclosure of
uncertainty in income tax positions by prescribing a minimum
recognition threshold that a tax position is required to satisfy
before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
The cumulative effect of adopting FIN 48 was a decrease in
tax reserves of $18 million, resulting in a decrease to
Veritas goodwill of $11 million, an increase of
$6 million to the April 1, 2007 Retained earnings
balance, and a $1 million increase in Capital in excess of
par value. Upon adoption, the gross liability for unrecognized
tax benefits at April 1, 2007 was $455 million,
exclusive of interest and penalties. This gross liability is
reduced by offsetting tax benefits associated with the
correlative effects of potential transfer pricing adjustments,
and state income taxes as well as payments made to date. Of the
total unrecognized tax benefits, $89 million, if recognized
would favorably affect our effective tax rate while the
remaining amount would reduce goodwill. In addition, consistent
with the provisions of FIN 48, certain reclassifications
were made to the balance sheet, including the reclassification
of $350 million of income tax liabilities from current to
non-current liabilities because payment of cash is not
anticipated within one year of the balance sheet date.
Our policy to include interest and penalties related to gross
unrecognized tax benefits within our provision for income taxes
did not change upon the adoption of FIN 48. To the extent
accrued interest and penalties do not ultimately become payable,
amounts accrued will be reduced in the period that such
determination is made, and reflected as a reduction of the
overall income tax provision, to the extent that the interest
expense had been provided through the tax provision, or as a
reduction to goodwill to the extent it had been recognized
through purchase accounting. At April 1, 2007, before any
tax benefits, we had $91 million of accrued interest and
$13 million of accrued penalties on unrecognized tax
benefits. Interest included in our provision for income taxes
was approximately $5 million for the three months ended
June 30, 2007.
We recorded an increase of unrecognized tax benefits of
approximately $64 million during the quarter-ended
June 30, 2007, of which $57 million is related to the
acquisition of Altiris and is reflected in the purchase
accounting for the acquisition. Of the remaining
$7 million, which was recorded through our income tax
provision for the quarter, approximately $5 million relates
to interest accrued during the period.
We file income tax returns in the United States
(U.S.) on a federal basis and in many
U.S. state and foreign jurisdictions. Our two most
significant tax jurisdictions are the U.S. and Ireland. Our
tax filings remain subject to examination by applicable tax
authorities for a certain length of time following the tax year
to which those filings relate. Our 2000 through 2007 tax years
remain subject to examination by the IRS for U.S. federal
tax purposes, and our 1995 through 2007 tax years remain subject
to examination by the appropriate governmental agencies for
Irish tax purposes. Other significant jurisdictions include
California and Japan. As of April 1, 2007, we are under
examination by the Internal Revenue Service, or IRS, for the
Veritas U.S. federal income taxes for the 2002 through 2005
tax years.
On June 26, 2006, we filed a petition with the
U.S. Tax Court to protest a Notice of Deficiency from the
IRS claiming that we owe $867 million, excluding penalties
and interest, for the 2000 through 2001 tax years of Veritas. On
August 30, 2006, the IRS answered our petition and the case
has been docketed for trial in U.S. Tax Court and is
scheduled to begin on June 30, 2008. In the March 2007
quarter, the IRS agreed to dismiss any penalty assessment, and
we have otherwise agreed to settle several of the lesser issues
(representing $35 million of the total assessment) for
$7 million of tax. As a result, the outstanding issue
represents $832 million of tax. No payments will be made on
the assessment until the issue is definitively resolved. If,
upon resolution, we are required to pay an amount in excess of
our provision for this matter, the incremental amounts due would
be accounted for principally as additions to the
18
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Veritas purchase price as an increase to goodwill. Any
incremental interest accrued related to periods subsequent to
the date of the Veritas acquisition would be recorded as an
expense in the period the matter is resolved.
The Company continues to monitor the progress of ongoing income
tax controversies and the impact, if any, of the expected
tolling of the statute of limitations in various taxing
jurisdictions. Considering these facts, the Company does not
currently believe there is a reasonable possibility of any
significant change to its total unrecognized tax benefits within
the next twelve months.
On March 29, 2006, we received a Notice of Deficiency from
the IRS claiming that we owe additional taxes, plus interest and
penalties, for the 2000 and 2001 tax years based on an audit of
Veritas. The incremental tax liability asserted by the IRS was
$867 million, excluding penalties and interest. On
June 26, 2006, we filed a petition with the U.S. Tax
Court protesting the IRS claim for such additional taxes. On
August 30, 2006, the IRS answered our petition and this
matter has been docketed for trial in U.S. Tax Court and is
scheduled to begin on June 30, 2008. We have subsequently
agreed to pay $7 million out of $35 million originally
assessed by the IRS in connection with one of the issues covered
in the assessment. The IRS has also agreed to waive the
assessment of penalties. We do not agree with the IRS on the
$832 million remaining at issue. We strongly believe the
IRS position with regard to this matter is inconsistent
with applicable tax laws and existing Treasury regulations, and
that our previously reported income tax provision for the years
in question is appropriate. See Note 11 for additional
information on this matter.
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 our press releases and SEC filings regarding
the companys financial results, which allegedly contained
revenue recognized from contracts that were unsigned or lacked
essential terms. The defendants to this matter filed a motion to
dismiss the CAC in July 2005; the motion was denied in May 2006.
The defendants to this matter intend to defend this case
vigorously. Because our liability, if any, cannot be reasonably
estimated, no amounts have been accrued for this matter. An
adverse outcome in this matter could have a material adverse
effect on our financial position and results of operations.
After Veritas announced in January 2003 that it would restate
its financial results as a result of transactions entered into
with AOL Time Warner in September 2000, numerous separate
complaints purporting to be class actions were filed in the
United States District Court for the Northern District of
California alleging that Veritas and some of its officers and
directors violated provisions of the Securities Exchange Act of
1934. The complaints contain varying allegations, including that
Veritas made materially false and misleading statements with
respect to its 2000, 2001 and 2002 financial results included in
its filings with the SEC, press releases and other public
disclosures. A consolidated complaint entitled In Re VERITAS
Software Corporation Securities Litigation was filed by the lead
plaintiff on July 18, 2003. On February 18, 2005, the
parties filed a Stipulation of Settlement in the class action.
On March 18, 2005, the Court entered an order preliminarily
approving the class action settlement. Pursuant to the terms of
the settlement, a $35 million settlement fund was
established on March 25, 2005. Veritas insurance
carriers funded the entire amount of the settlement fund. In
July 2007, the Court of Appeals vacated the settlement, finding
that the notice of settlement was inadequate. The matter has
been returned to the District Court for further proceedings,
including reissuance of the notice. If the settlement is not
approved, an adverse outcome in this matter could have a
material adverse effect on our financial position and results of
operations.
19
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 effect on our financial
condition or results of operations.
|
|
Note 13.
|
Segment
Information
|
During the June 2007 quarter, we added an additional segment
which consists of the Altiris products. We also moved our
Ghosttm,
pcAnywheretm,
and
LiveStatetm
Delivery products from the Security and Data Management segment
to the Altiris segment. We also moved our Managed Security
Services and DeepSight products and services from the Security
and Data Management segment to the Services segment. In
addition, following implementation of our new enterprise
resource planning system completed during the December 2006
quarter, we refined the methodology of allocating maintenance
revenues among our enterprise segments. The maintenance analysis
largely impacts our Data Center Management segment, offset by
the impact to our Security and Data Management segment. As a
result of these revisions, we have recast segment information
for fiscal 2007 to reflect the segment reporting structure
described below.
Our operating segments are significant strategic business units
that offer different products and services, distinguished by
customer needs. As of June 30, 2007, we operated in six
operating segments:
|
|
|
|
|
Consumer Products. Our Consumer Products
segment focuses on delivering our Internet security,
PC tuneup, and backup products to individual users and home
offices.
|
|
|
|
Security and Data Management. Our Security and
Data Management segment focuses on providing large, medium, and
small-sized business with solutions for compliance and security
management, endpoint security, messaging management, and data
protection management software solutions that allow our
customers to secure, provision, backup, and remotely access
their laptops, PCs, mobile devices, and servers.
|
|
|
|
Data Center Management. Our Data Center
Management segment focuses on providing enterprise and large
enterprise customers with storage and server management, data
protection, and application performance management solutions
across heterogeneous storage and server platforms.
|
|
|
|
Services. Our Services segment provides
customers with leading IT risk management services and solutions
to manage security, availability, performance and compliance
risks across multi-vendor environments. In addition, our
services, including maintenance and technical support, managed
security services, consulting, education, and threat and early
warning systems, help customers optimize and maximize their
Symantec technology investments.
|
|
|
|
Altiris. Our Altiris segment provides
information technology management software that enables
businesses to easily manage and service network-based endpoints.
This allows customers to better manage and enforce security
policies at the endpoint, identify and protect against threats,
and repair and service assets.
|
|
|
|
Other. Our Other segment is comprised of
sunset products and products nearing the end of their life
cycle. It also includes general and administrative expenses;
amortization of acquired product rights, other intangible
assets, and other assets; charges, such as acquired in-process
research and development, patent settlement, stock-based
compensation, and restructuring; and certain indirect costs that
are not charged to the other operating segments.
|
The accounting policies of the segments are described in our
Annual Report on
Form 10-K
for the fiscal year ended March 31, 2007. 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 certain income and
expenses. Except for goodwill, as disclosed in Note 5, the
majority of our assets are not discretely identified by segment.
The depreciation and amortization of our property,
20
SYMANTEC
CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equipment, and leasehold improvements are allocated based on
headcount, unless specifically identified by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
and Data
|
|
|
Data Center
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Products
|
|
|
Management
|
|
|
Management
|
|
|
Services
|
|
|
Altiris(a)
|
|
|
Other
|
|
|
Company
|
|
|
|
(In thousands)
|
|
|
Three months ended
June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
423,750
|
|
|
$
|
423,261
|
|
|
$
|
399,225
|
|
|
$
|
81,146
|
|
|
$
|
72,715
|
|
|
$
|
241
|
|
|
$
|
1,400,338
|
|
Operating income (loss)
|
|
|
233,709
|
|
|
|
128,348
|
|
|
|
142,676
|
|
|
|
(23,322
|
)
|
|
|
16,402
|
|
|
|
(363,617
|
)
|
|
|
134,196
|
|
Depreciation and amortization
expense
|
|
|
1,604
|
|
|
|
7,703
|
|
|
|
13,749
|
|
|
|
3,097
|
|
|
|
257
|
|
|
|
187,035
|
|
|
|
213,445
|
|
Three months ended
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
381,778
|
|
|
$
|
404,289
|
|
|
$
|
368,054
|
|
|
$
|
71,914
|
|
|
$
|
39,829
|
|
|
$
|
4
|
|
|
$
|
1,265,868
|
|
Operating income (loss)
|
|
|
240,390
|
|
|
|
104,875
|
|
|
|
129,885
|
|
|
|
(10,997
|
)
|
|
|
20,333
|
|
|
|
(340,414
|
)
|
|
|
144,072
|
|
Depreciation and amortization
expense
|
|
|
1,165
|
|
|
|
8,672
|
|
|
|
12,759
|
|
|
|
2,816
|
|
|
|
131
|
|
|
|
181,333
|
|
|
|
206,876
|
|
|
|
|
(a) |
|
Included in the Altiris segment are the
GhostTM,
pcAnywhereTM,
and
LiveStateTM
Delivery products which we moved from the Security and Data
Management segment. |
21
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements and Factors That May Affect Future Results
The discussion below contains forward-looking statements, which
are subject to safe harbors under the Securities Act of 1933, as
amended, or the Securities Act, and the Securities Exchange Act
of 1934, as amended, or the Exchange Act. Forward-looking
statements include references to the expected results of the
cost savings initiative that was announced in January 2007 and
our ability to utilize our deferred tax assets, as well as
statements including words such as expects,
plans, anticipates,
believes, estimates,
predicts, projects, and similar
expressions. 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
impacts of 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 in Risk Factors, set
forth in Part I, Item 1A, of our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2007. We encourage you
to read this section carefully.
OVERVIEW
Our
Business
We are a world leader in providing infrastructure software to
protect individuals and enterprises from a variety of risks. We
provide consumers, home offices, and small businesses with
Internet security and personal computer, or PC, problem-solving
products; we provide small and medium-sized businesses with
software to provision, backup, secure, and remotely access their
PCs and servers; we provide enterprise and large enterprise
customers with security, storage and server management, data
protection, and application performance management solutions;
and we provide a full range of consulting and educational
services to enterprises of all sizes. In addition, we
continually work to enhance the features and functionality of
our existing products, extend our product leadership, and create
innovative solutions for our customers to address the rapidly
changing threat environment. Founded in 1982, we have operations
in 40 countries worldwide.
On April 6, 2007, we completed our acquisition of Altiris,
Inc., a leading provider of IT management software that enables
businesses to easily manage and service network-based endpoints.
We used approximately $841 million of our cash and cash
equivalents to fund the acquisition, which amount was net of
Altiris cash and cash equivalents balance. We believe this
acquisition will enable us to help customers better manage and
enforce security policies at the endpoint, identify and protect
against threats, and repair and service assets.
Our
Operating Segments
Our operating segments are significant strategic business units
that offer different products and services, distinguished by
customer needs. During the June 2007 quarter, we added an
additional segment which consists of the Altiris products. We
also moved our
Ghosttm,
pcAnywheretm,
and
LiveStatetm
Delivery products from the Security and Data Management segment
to the Altiris segment. We also moved our Managed Security
Services and DeepSight products and services from the Security
and Data Management segment to the Services segment. In
addition, following implementation of our new enterprise
resource planning system completed during the December 2006
quarter, we refined the methodology of allocating maintenance
revenues among our enterprise segments. This change largely
positively impacts our Data Center Management segment to the
offsetting detriment of the Security and Data Management
segment. These initiatives have resulted in us recasting our
segment data for all periods presented.
As of June 30, 2007, we had six operating segments,
descriptions of which are provided in Note 13 of Notes to
Condensed Consolidated Financial Statements.
22
Financial
Results and Trends
Our net income was $95 million for the three-months ended
June 30, 2007 as compared to our net income of
$101 million for the three-months ended June 30, 2006.
The lower net income for the June 2007 quarter as compared to
the June 2006 quarter was primarily due to higher sales and
marketing expenses and a restructuring charge of
$19 million incurred in the June 2007 quarter related to
the 2007 cost savings initiative discussed below. During the
June 2007 quarter, employee headcount increased by approximately
3% from March 31, 2007 and by approximately 10% from
June 30, 2006, partially as a result of our acquisition of
Altiris.
Revenue for the three months ended June 2007 was 11% higher than
revenue for the three months ended June 2006. For the three
months ended June 30, 2007, we delivered revenue growth across
all of our geographic regions as compared to the three months
ended June 2006 and experienced revenue growth in all of our
segments. This growth was largely due to our having a higher
deferred revenue balance at the beginning of the June 2007
quarter than at the beginning of the June 2006 quarter, which
resulted in a larger amount of deferred revenue being converted
into revenue in the fiscal 2008 period versus the fiscal 2007
period. The factors contributing to the growth in deferred
revenue are discussed more fully in Results of
Operations below. We believe our revenue growth is also
attributable to increased awareness of Internet-related threats
around the world and demand for storage solutions.
Weakness in the U.S. dollar compared to foreign currencies
positively impacted our international revenue growth by
approximately $38 million during the three months ended
June 30, 2007 as compared to the June 2006 quarter. We are
unable to predict the extent to which revenues in future periods
will be impacted by changes in foreign currency exchange 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.
In the fourth quarter of fiscal 2007, we implemented a cost
savings initiative, which included a workforce reduction of
approximately five percent worldwide. Once these cost reductions
are fully implemented, we expect to save approximately
$200 million in costs on an annualized basis. The cost
savings initiative resulted in a restructuring charge of
$19 million in the first quarter of fiscal 2008. We expect
that the cost savings initiative will result in an additional
restructuring charge in other future periods.
Our gross margins and operating expenses were affected in the
June 2007 quarter, and we expect them to be affected in future
periods, as a result of recent changes in the terms of some of
our relationships with key Original Equipment Manufacturers, or
OEMs. We have negotiated new contract terms with some of our OEM
partners, which have resulted in payments to OEM partners being
included as Operating expenses rather than Cost of revenues. In
general, payments to OEMs made on a placement fee per unit basis
will be treated as Operating expenses, while payments based on a
revenue-sharing model will be amortized as Cost of revenues. As
a result of these recent changes, we expect Cost of revenues to
decrease and we expect Operating expenses to increase. The
increase in Operating expenses will more than offset the
decrease in Cost of revenues because placement fee arrangements
are expensed on an estimated average cost basis, while
revenue-sharing arrangements are amortized ratably over a
one-year period, and because payments to OEMs have increased.
Critical
Accounting Estimates
On April 1, 2007, we adopted a new pronouncement related to
income taxes, as discussed under the Significant Accounting
Policies portion of Note 1. Other than this, there have
been no significant changes in our critical accounting estimates
during the three-months ended June 30, 2007 as compared to
the critical accounting estimates disclosed in Managements
Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2007.
23
RESULTS
OF OPERATIONS
Total Net
Revenues
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Net revenues
|
|
$
|
1,400,338
|
|
|
$
|
1,265,868
|
|
Period over period increase
|
|
$
|
134,470
|
|
|
|
|
|
|
|
|
11
|
%
|
|
|
|
|
The increase in revenue for the three months ended June 30,
2007 over the same prior year period is primarily due to higher
amortization of deferred revenue, as a result of the higher
amount of deferred revenue at the beginning of the June 2007
quarter than at the beginning of the June 2006 quarter. Our
total deferred revenue was $2.163 billion and
$2.754 billion at the beginning of the first quarter of
fiscal 2007 and 2008, and was $2.209 billion and
$2.664 billion at the end of each such quarter,
respectively. The higher deferred revenue balance at the
beginning of the June 30, 2007 quarter is due to a greater
portion of the revenue from deals being subject to deferral in
the Companys fiscal year ended March 31, 2007
compared to the prior year. This increase in deferred revenue is
the result of our doing more multi-year deals, selling more
services along with our license and maintenance arrangements,
and the combination of our buying programs for all of our
enterprise offerings, which resulted in a change in the
vendor-specific objective evidence, VSOE, of pricing for our
storage and availability offerings. The increase in June 2007
quarter revenues was augmented by $42 million as a result
of growth in demand for our Consumer products.
Furthermore, June 2007 quarter revenues increased
$37 million due to the sales of products acquired through
our April 6, 2007 acquisition of Altiris for which there is
no comparable revenue in the June 2006 quarter. The segment
discussions that follow further describe the revenue increases.
Included in the total net revenues increase is a favorable
foreign currencies impact of $38 million in the June 2007
quarter compared to the June 2006 quarter.
As a result of our initiative to offer customers a more
comprehensive solution to protect and manage a global IT
infrastructure, we expect to sell more services with our license
and maintenance contracts. VSOE may not exist for some of these
services, which will result in our recognizing an increased
amount of deferred revenue, and increased classification of
revenues as Content, subscriptions, and maintenance revenue,
from these contracts. We also increased the amount of
maintenance renewals sold with a license component, resulting in
a larger portion of revenues associated with contracts being
classified as Content, subscriptions, and maintenance revenue,
which is subject to deferral, instead of Licenses revenue, which
is generally recognized immediately.
Content,
subscriptions, and maintenance revenues
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Content, subscriptions, and
maintenance revenues
|
|
$
|
1,086,518
|
|
|
$
|
917,546
|
|
Percentage of total net revenues
|
|
|
78
|
%
|
|
|
72
|
%
|
Period over period increase
|
|
$
|
168,972
|
|
|
|
|
|
|
|
|
18
|
%
|
|
|
|
|
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. Beginning with the
release of our 2006 consumer products that include content
updates in the December 2005 quarter, we recognize revenue
related to these products ratably. As a result, this revenue has
been classified as Content, subscriptions, and maintenance
beginning in the December 2005 quarter. In addition, as noted
above, increased flexibility in contract
24
terms and the combination of our buying programs in the December
2006 quarter have impacted revenue recognition. These changes
cause a larger portion of revenue associated with contracts to
be classified as Content, subscriptions, and maintenance revenue
instead of Licenses revenue.
Content, subscriptions, and maintenance revenue also includes
professional services revenue, which consists primarily of the
fees we earn related to consulting and educational services. We
generally recognize revenue from our professional services as
the services are performed or upon written acceptance from
customers, if applicable, assuming all other conditions for
revenue recognition have been met.
Content, subscriptions, and maintenance revenues increased in
the three months ended June 30, 2007 as compared to the
three months ended June 30, 2006 primarily due to a
$109 million increase related to enterprise products and
services, excluding acquired Altiris products, as a result of
higher amortization of deferred revenue.
Revenue related to our Consumer Products increased
$48 million in the June 2007 quarter as compared to the
June 2006 quarter primarily due to growth in sales of Norton
Internet Security products and in online revenues due to growth
in the use of the Internet, and increased awareness and
sophistication of security threats. Further, June 2007 quarter
revenues increased $12 million due to the sales of products
acquired through our acquisition of Altiris for which there is
no comparable revenue in the June 2006 quarter.
Licenses
revenues
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Licenses revenues
|
|
$
|
313,820
|
|
|
$
|
348,322
|
|
Percentage of total net revenues
|
|
|
22
|
%
|
|
|
28
|
%
|
Period over period increase
(decrease)
|
|
$
|
(34,502
|
)
|
|
|
|
|
|
|
|
(10
|
%)
|
|
|
|
|
Licenses revenues decreased in the three months ended
June 30, 2007 as compared to the three months ended
June 30, 2006 primarily due to an aggregate decrease in
revenues from the Security and Data Management and Data Center
Management segments of $50 million as a result of a
decreased volume of large transactions. The June 2007 quarter
decrease is partially offset by an increase of $25 million
due to the sales of products acquired through our acquisition of
Altiris for which there is no comparable revenue in the June
2006 quarter.
Net
revenues by segment
Consumer
Products segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Consumer Products revenues
|
|
$
|
423,750
|
|
|
$
|
381,778
|
|
Percentage of total net revenues
|
|
|
30
|
%
|
|
|
30
|
%
|
Period over period increase
|
|
$
|
41,972
|
|
|
|
|
|
|
|
|
11
|
%
|
|
|
|
|
Consumer Products revenues increased in the three-month period
ended June 30, 2007 as compared to the three months ended
June 30, 2006 primarily due to an aggregate increase of
$76 million in revenue from our Norton Internet Security
and Norton 360 products. This increase was partially offset by
aggregate decreases in revenue from our Norton AntiVirus and
Norton System
Workstm
products of $30 million. These decreases resulted from our
customers continued migration to the Norton Internet
Security products and to our new Norton 360 products, which
offer broader protection to address the rapidly changing threat
environment. Our electronic orders include Original Equipment
Manufacturers, or OEM, subscriptions, upgrades, online sales,
and renewals. Revenue from electronic orders (which includes
sales of our Norton Internet Security products, Norton 360
products, and our Norton
25
AntiVirus products) grew by $51 million in the June 2007
quarter as compared to the June 2006 quarter. Included in the
total Consumer Products increase is a favorable foreign
currencies impact of $14 million in the June 2007 quarter
compared to the June 2006 quarter.
Security
and Data Management segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Security and Data Management
revenues
|
|
$
|
423,261
|
|
|
$
|
404,289
|
|
Percentage of total net revenues
|
|
|
30
|
%
|
|
|
32
|
%
|
Period over period increase
|
|
$
|
18,972
|
|
|
|
|
|
|
|
|
5
|
%
|
|
|
|
|
The increase in revenues from our Security and Data Management
segment in the three-month period ended June 30, 2007 as
compared to the three-months ended June 30, 2006 was
primarily due to an aggregate increase in revenue from our
Enterprise Messaging, Compliance, and Backup products of
$14 million as a result of higher amortization of deferred
revenue, driven by a higher amount of deferred revenue at the
beginning of the quarter than at the beginning of the comparable
period last year, for the reasons discussed above. Included in
the total Security and Data Management increase is a favorable
foreign currencies impact of $11 million in the June 2007
quarter compared to the June 2006 quarter.
Data
Center Management segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Data Center Management revenues
|
|
$
|
399,225
|
|
|
$
|
368,054
|
|
Percentage of total net revenues
|
|
|
29
|
%
|
|
|
29
|
%
|
Period over period increase
|
|
$
|
31,171
|
|
|
|
|
|
|
|
|
8
|
%
|
|
|
|
|
The increase in Data Center Management revenue in the three
months ended June 30, 2007 as compared to the three months
ended June 30, 2006 was primarily due to an aggregate
increase in revenue from our NetBackup and Storage Foundation
products of $26 million driven by increased demand for
products related to the standardization and simplification of
data center infrastructure and higher amortization of deferred
revenue, as a result of the higher amount of deferred revenue at
the beginning of the quarter than at the beginning of the
comparable period last year, for the reasons discussed above.
Included in the total in Data Center Management increase is a
favorable foreign currencies impact of $10 million in the
June 2007 quarter compared to the June 2006 quarter
Services
segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Services revenues
|
|
$
|
81,146
|
|
|
$
|
71,914
|
|
Percentage of total net revenues
|
|
|
6
|
%
|
|
|
6
|
%
|
Period over period increase
|
|
$
|
9,232
|
|
|
|
|
|
|
|
|
13
|
%
|
|
|
|
|
Revenue from our Services segment increased in three-month
period ended June 30, 2007 as compared to the three months
ended June 30, 2006 due to increased demand in our service
offerings and the contribution to Service revenues of service
offerings acquired in our acquisition of Company-i.
26
Altiris
segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Altiris revenues
|
|
$
|
72,715
|
|
|
$
|
39,829
|
|
Percentage of total net revenues
|
|
|
5
|
%
|
|
|
3
|
%
|
Period over period increase
|
|
$
|
32,886
|
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
* |
|
Percentage not meaningful |
The increase in Altiris revenue in the three-month period ended
June 30, 2007 as compared to the three months ended
June 30, 2006 was primarily due to $37 million in
sales of products acquired through our acquisition of Altiris
for which there is no comparable revenue in the June 2006
quarter. This amount was offset slightly by the continued
decline in sales of our pcAnywhere product.
Other
segment
Our Other segment is comprised primarily of sunset products and
products nearing the end of their life cycle. Revenues from the
Other segment during the three-month period ended June 30,
2007 and 2006 were immaterial.
Net
revenues by geographic region
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
North America (U.S. and Canada)
|
|
$
|
725,005
|
|
|
$
|
668,478
|
|
Percentage of total net revenues
|
|
|
52
|
%
|
|
|
53
|
%
|
Period over period increase
|
|
$
|
56,527
|
|
|
|
|
|
EMEA (Europe, Middle East, Africa)
|
|
$
|
457,804
|
|
|
$
|
397,547
|
|
Percentage of total net revenues
|
|
|
33
|
%
|
|
|
31
|
%
|
Period over period increase
|
|
$
|
60,257
|
|
|
|
|
|
Asia Pacific/Japan
|
|
$
|
191,086
|
|
|
$
|
174,476
|
|
Percentage of total net revenues
|
|
|
14
|
%
|
|
|
14
|
%
|
Period over period increase
|
|
$
|
16,610
|
|
|
|
|
|
Latin America
|
|
$
|
26,443
|
|
|
$
|
25,367
|
|
Percentage of total net revenues
|
|
|
2
|
%
|
|
|
2
|
%
|
Period over period increase
|
|
$
|
1,076
|
|
|
|
|
|
International revenues increased in the three months ended
June 30, 2007 as compared to the three months ended
June 30, 2006 primarily due to the growth in revenues from
our Consumer Products of $31 million, driven by sales of
Norton Internet Security Products, growth in revenues from our
Data Center Management products of $22 million, increased
demand for products related to the standardization and
simplification of data center infrastructure, and sales of
products acquired through our acquisition of Altiris of
$13 million for which there is no comparable revenue in the
June 2006 quarter. In North America, the increase from
the June 2007 quarter compared to the June 2006 quarter was
primarily due to sales of products acquired through our
acquisition of Altiris of $24 million for which there is no
comparable revenue in the June 2006 quarter, growth in revenues
from our Security and Data Management products of
$14 million, driven by increased sales in our channel-based
business, and growth in revenues from our Consumer Products of
$11 million, driven by Norton Internet Security. Both
domestic and international revenue from enterprise offerings
were positively impacted by higher amortization of deferred
revenue, as a result of the higher amount of deferred revenue at
the beginning of the quarter than at the
27
beginning of the comparable period last year, for the reasons
discussed above. Foreign currencies had a favorable impact on
net revenues of $38 million in the June 2007 quarter
compared to the June 2006 quarter.
We are unable to predict the extent to which revenues in future
periods will be impacted by changes in foreign currency exchange
rates. If international sales become a greater portion of our
total sales in the future, changes in foreign currency exchange
rates may have a potentially greater impact on our revenues and
operating results.
Cost of
Revenues
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Cost of revenues
|
|
$
|
310,264
|
|
|
$
|
298,659
|
|
Gross margin
|
|
|
78
|
%
|
|
|
76
|
%
|
Period over period increase
|
|
$
|
11,605
|
|
|
|
|
|
|
|
|
4
|
%
|
|
|
|
|
Cost of revenues consists primarily of amortization of acquired
product rights, fee-based technical support costs, costs of
billable services, payments to OEMs under revenue-sharing
arrangements, manufacturing and direct material costs, and
royalties paid to third parties under technology licensing
agreements.
Gross margin increased in the three months ended June 30,
2007 as compared to the three months ended June 30, 2006
due primarily to higher revenues more than offsetting year over
year increases in services and technical support costs. We
anticipate that our net revenues from our Services segment may
grow to comprise a higher percentage of our total net revenues,
which would have a negative impact on our gross margin, as our
services typically have a higher Cost of revenues than our
software products. Gross margin was also impacted as the terms
of several of our OEM arrangements changed from revenue-sharing
arrangements to placement fee arrangements during fiscal 2007.
Placement fee arrangements are expensed on an estimated average
cost basis as sales and marketing expenses, while
revenue-sharing arrangements are amortized as Cost of revenues
ratably over a one-year period.
Cost
of content, subscriptions, and maintenance
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Cost of content, subscriptions,
and maintenance
|
|
$
|
209,666
|
|
|
$
|
195,136
|
|
As a percentage of related revenue
|
|
|
19
|
%
|
|
|
21
|
%
|
Period over period increase
|
|
$
|
14,530
|
|
|
|
|
|
|
|
|
7
|
%
|
|
|
|
|
Cost of content, subscriptions, and maintenance consists
primarily of fee-based technical support costs, costs of
billable services, and payments to OEMs under revenue-sharing
agreements. Cost of content, subscriptions, and maintenance
decreased as a percentage of the related revenue in the three
months ended June 30, 2007 as compared to the three months
ended June 30, 2006. The quarter over quarter decrease in
margin is primarily driven by higher revenues more than
offsetting increases in Technical Support and Services expenses.
We expect our cost of content, subscriptions and maintenance to
be affected in future periods as a result of recent changes in
the terms of some of our key OEM relationships, as discussed
above under Financial Results and Trends.
28
Cost
of licenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Cost of licenses
|
|
$
|
11,238
|
|
|
$
|
15,912
|
|
As a percentage of related revenue
|
|
|
4
|
%
|
|
|
5
|
%
|
Period over period increase
(decrease)
|
|
$
|
(4,674
|
)
|
|
|
|
|
|
|
|
(29
|
)%
|
|
|
|
|
Cost of licenses consists primarily of royalties paid to third
parties under technology licensing agreements and manufacturing
and direct material costs. Cost of licenses decreased as a
percentage of the related revenue in the three months ended
June 30, 2007 as compared to the three months ended
June 30, 2006. The quarter over quarter decrease in
absolute dollars is primarily due to high obsolete reserves in
the June 30, 2006 quarter due to the Companys
decision to exit certain aspects of the appliance business.
Amortization
of acquired product rights
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Amortization of acquired product
rights
|
|
$
|
89,360
|
|
|
$
|
87,611
|
|
Percentage of total net revenues
|
|
|
6
|
%
|
|
|
7
|
%
|
Period over period increase
(decrease)
|
|
$
|
1,749
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
|
|
Acquired product rights are comprised of developed technologies,
revenue-related order backlog and contracts, and patents from
acquired companies. The amortization in June 2007 and June 2006
quarter is primarily associated with the Veritas acquisition,
for which amortization began in July 2005. In connection with
the Veritas acquisition, we recorded $1.3 billion in
acquired product rights which are being amortized over their
expected useful lives of three months to five years. We amortize
the fair value of all other acquired product rights over their
expected useful lives, generally one to eight years.
Amortization in the June 2007 quarter was higher than the June
2006 quarter primarily resulting from amortization associated
with the Altiris acquisition, which was offset in part by
certain acquired product rights becoming fully amortized. For
further discussion of acquired product rights and related
amortization, see Notes 4 and 5 of the Notes to
Consolidated Financial Statements.
Operating
Expenses
Sales
and marketing expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Sales and marketing
|
|
$
|
568,530
|
|
|
$
|
467,449
|
|
Percentage of total net revenues
|
|
|
41
|
%
|
|
|
37
|
%
|
Period over period increase
|
|
$
|
101,081
|
|
|
|
|
|
|
|
|
22
|
%
|
|
|
|
|
The increase in sales and marketing expense in the three month
period ended June 30, 2007 as compared to the comparable
period last year was primarily due to an increase in headcount
and the change in our OEM expense model. The increase in
headcount contributed approximately $65 million in employee
compensation expense. The remaining increase is a result of
changes in our OEM arrangements discussed above under
Financial Results and Trends, which accounted for
$42 million of the increase from the June 2006 quarter. We
expect sales and marketing
29
expenses to continue to increase for the remainder of fiscal
2008 compared to the comparable fiscal 2007 periods due to
recent changes in the terms of some of our key OEM
relationships, as discussed above.
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Research and development
|
|
$
|
225,578
|
|
|
$
|
213,195
|
|
Percentage of total net revenues
|
|
|
16
|
%
|
|
|
17
|
%
|
Period over period increase
|
|
$
|
12,383
|
|
|
|
|
|
|
|
|
6
|
%
|
|
|
|
|
The increase in research and development expenses in the
three-month period ended June 2007 as compared to the comparable
period last year was due primarily to an increase in employee
headcount, resulting in additional employee compensation expense.
General
and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
General and administrative
|
|
$
|
85,845
|
|
|
$
|
78,621
|
|
Percentage of total net revenues
|
|
|
6
|
%
|
|
|
6
|
%
|
Period over period increase
|
|
$
|
7,224
|
|
|
|
|
|
|
|
|
9
|
%
|
|
|
|
|
General and administrative expense remained relatively
consistent as a percentage of revenues for the three-month
period ended June 30, 2007 as compared to the comparable
period last year.
Amortization
of other intangible assets
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Amortization of other intangible
assets
|
|
$
|
56,925
|
|
|
$
|
50,614
|
|
Percentage of total net revenues
|
|
|
4
|
%
|
|
|
4
|
%
|
Period over period increase
|
|
$
|
6,311
|
|
|
|
|
|
|
|
|
12
|
%
|
|
|
|
|
Other intangible assets are comprised of customer base, trade
names, partnership agreements, and marketing-related assets. The
increased amortization in the three months ended June 30,
2007 compared to the three months ended June 30, 2006 is
primarily associated with the acquisitions of Company-i Limited,
and 4FrontSecurity, Inc. that occurred during fiscal 2007, and
the acquisition of Altiris, which occurred during the three
months ended June 30, 2007. We recorded $223 million
of intangible assets related to the Altiris acquisition, which
will be amortized over their useful lives of one to eight years.
For further discussion of other intangible assets and related
amortization, see Note 5 of Notes to Condensed Consolidated
Financial Statements.
30
Restructuring
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Restructuring
|
|
$
|
19,000
|
|
|
$
|
13,258
|
|
Percentage of total net revenues
|
|
|
1
|
%
|
|
|
1
|
%
|
Period over period increase
|
|
$
|
5,742
|
|
|
|
|
|
|
|
|
43
|
%
|
|
|
|
|
In the three months ended June 30, 2007, we recorded
approximately $19 million of restructuring expenses related
to the 2007 cost savings initiative announced in January 2007.
The costs recorded during the three months ended June 30,
2007 were related primarily to employee severance payments. For
further discussion on restructuring, see Note 9 of Notes to
the Condensed Consolidated Financial Statements.
In the June 2006 quarter, we recorded $13 million of
restructuring costs. These restructuring costs related to
executive severance and to severance, associated benefits, and
outplacement services for the termination of 184 redundant
employees located in the United States, Europe, and Asia Pacific.
Non-operating
Income and Expense
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Interest income
|
|
$
|
20,821
|
|
|
$
|
27,816
|
|
Interest expense
|
|
|
(6,291
|
)
|
|
|
(6,678
|
)
|
Other income (expense), net
|
|
|
1,266
|
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,796
|
|
|
$
|
20,956
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net revenues
|
|
|
1
|
%
|
|
|
2
|
%
|
Period over period decrease
|
|
$
|
(5,160
|
)
|
|
|
|
|
|
|
|
(25
|
)%
|
|
|
|
|
The decrease in interest income in the three months ended
June 30, 2007 as compared to the comparable period last
year was due primarily to a lower average balance of our
invested cash and available-for-sale securities due to our use
of cash for the repurchase of our stock on the open market and
the purchase of Altiris.
Interest expense in the three months ended June 30, 2007 as
compared to the comparable period last year remained relatively
consistent.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Provision for income taxes
|
|
$
|
54,786
|
|
|
$
|
64,494
|
|
Effective income tax rate
|
|
|
36.5
|
%
|
|
|
39
|
%
|
Period over period decrease
|
|
$
|
(9,708
|
)
|
|
|
|
|
|
|
|
(15
|
)%
|
|
|
|
|
The effective tax rate was approximately 36.5% and 39% for the
three-month periods ended June 30, 2007 and 2006. The
effective tax rate for both periods is impacted by the benefits
of lower-taxed foreign earnings and domestic manufacturing tax
incentives, offset by state income taxes and non-deductible
stock-based compensation resulting from the adoption of
SFAS No. 123R, Share-Based Payment. The higher
effective tax rate for the
31
June 2006 quarter includes an accrual of approximately
$6 million for penalty risks associated with the late
filing of Veritas final pre-acquisition income tax return.
The Company adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes, (FIN 48) effective April 1,
2007. FIN 48 addresses the accounting for and disclosure of
uncertainty in income tax positions, by prescribing a minimum
recognition threshold that a tax position is required to satisfy
before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
The cumulative effect of adopting FIN 48 was a decrease in
tax reserves of $18 million, resulting in a decrease to
Veritas goodwill of $11 million, an increase of
$6 million to the April 1, 2007 Retained earnings
balance, and a $1 million increase in Paid in Capital. Upon
adoption, the gross liability for unrecognized tax benefits at
April 1, 2007 was $455 million, exclusive of interest
and penalties. This gross liability is reduced by offsetting tax
benefits associated with the correlative effects of potential
transfer pricing adjustments and state income taxes as well as
payments made to date. Of the total unrecognized tax benefits,
$89 million, if recognized, would favorably affect the
companys effective tax rate while the remaining amount
would affect goodwill. In addition, consistent with the
provisions of FIN 48, certain reclassifications were made
to the balance sheet, including the reclassification of
$350 million of income tax liabilities from current to
non-current liabilities because payment of cash is not
anticipated within one year of the balance sheet date.
We believe realization of substantially all of our net deferred
tax assets as of June 30, 2007 is more likely than not
based on the future reversal of temporary tax differences and
upon future taxable earnings exclusive of reversing temporary
differences in certain foreign jurisdictions. Levels of future
taxable income are subject to the various risks and
uncertainties discussed in Risk Factors, set forth in
Part I, Item 1A, of our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2007. 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 assess the
need for an additional valuation allowance on a quarterly basis.
We must make certain estimates and judgments in determining
income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of tax credits,
benefits, and deductions, and in the calculation of certain tax
assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and
financial statement purposes, as well as the interest and
penalties relating to these uncertain tax positions. Significant
changes to these estimates may result in an increase or decrease
to our tax provision in a subsequent period.
We report our results of operations based on our determinations
of the amount of taxes owed in the various tax jurisdictions in
which we operate. As a United States company with significant
international activities and operations, we make transfer
pricing determinations with respect to transfers of intellectual
property, goods and services between and among us and our
foreign subsidiaries. These pricing determinations can be
complex and are subject to challenge by taxing authorities in
the various tax jurisdictions in which we and our subsidiaries
operate. From time to time, we receive notices that a tax
authority to which we are subject has determined that we owe a
greater amount of tax than we have reported to such authority,
and we are regularly engaged in discussions, and sometimes
disputes, with these tax authorities. Our current disputes with
the U.S. Internal Revenue Service, which relate in large
part to transfer pricing matters, are an example of this type of
matter. If our transfer pricing methodologies are successfully
challenged in the matters currently in dispute, it is likely
that subsequent inter-company transfers that have been valued
using similar methodologies will also be challenged.
If the ultimate determination of our taxes owed in any of these
jurisdictions is for an amount in excess of the tax provision we
have recorded or reserved for, our operating results, cash
flows, and financial condition could be adversely affected.
32
LIQUIDITY
AND CAPITAL RESOURCES
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Net cash provided by (used for)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
351,309
|
|
|
$
|
368,240
|
|
Investing activities
|
|
|
(1,111,273
|
)
|
|
|
(14,138
|
)
|
Financing activities
|
|
|
(437,060
|
)
|
|
|
952,388
|
|
Effect of exchange rate
fluctuations on cash and cash equivalents
|
|
|
12,039
|
|
|
|
63,405
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
|
$
|
(1,184,985
|
)
|
|
$
|
1,369,895
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007, our principal source of liquidity was
our existing cash, cash equivalents, and short-term investments
of $2.0 billion, of which 27% was held domestically and the
remainder was held outside of the U.S. In April 2007, we
completed our acquisition of Altiris, Inc. We used approximately
$841 million of our domestic cash and cash equivalents
balance to fund the purchase price of Altiris, which amount is
net of Altiris cash and cash equivalents balances.
In June 2006, we issued $1.1 billion principal amount of
0.75% Convertible Senior Notes due June 15, 2011, and
$1.0 billion principal amount of 1.00% Convertible
Senior Notes due June 15, 2013, to initial purchasers in a
private offering for resale to qualified institutional buyers
pursuant to SEC Rule 144A. We refer to these Notes
collectively as the Senior Notes. Concurrently with the issuance
of the Senior Notes, we entered into note hedge transactions
with affiliates of certain of the initial purchasers whereby we
have the option to purchase up to 110 million shares of our
common stock at a price of $19.12 per share. In addition,
concurrently with the issuance of the Senior Notes, we also sold
warrants to affiliates of certain of the initial purchasers
whereby they have the option to purchase up to 110 million
shares of our common stock at a price of $27.3175 per share. The
warrants expire on various dates from July 2011 through August
2013 and must be settled in net shares.
For additional information regarding the Senior Notes and
related transactions, see Note 6 of the Notes to Condensed
Consolidated Financial Statements, which information is
incorporated herein by reference. For information regarding the
deferred tax asset established in connection with the note hedge
transactions, see Note 6 of the Notes to Condensed
Consolidated Financial Statements, which information is
incorporated herein by reference.
The cost incurred in connection with the note hedge
transactions, net of the related tax benefit and the proceeds
from the sale of the warrants, is included as a net reduction in
Capital in excess of par value in the accompanying Condensed
Consolidated Balance Sheets as of June 30, 2007, in
accordance with the guidance in Emerging Issues Task Force
Issue, or EITF,
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock.
During April 2006, we purchased two office buildings totaling
approximately 236,000 square feet in Cupertino, California
for $81 million. Approximately 64,000 square feet is
leased to a third party.
On January 24, 2007, we announced that the Board of
Directors authorized the repurchase of $1 billion of
Symantec common stock without a scheduled expiration date. As of
June 30, 2007, we have completed the $1 billion share
repurchase program. On June 14, 2007, we announced that our
Board of Directors authorized the repurchase of an additional
$2 billion of Symantec common stock, without a scheduled
expiration date. As of June 30, 2007 we have not made any
repurchases under this plan.
We believe that our cash balances, cash that we generate over
time from operations, and our borrowing capacity will be
sufficient to satisfy our anticipated cash needs for working
capital and capital expenditures for at least the next
12 months.
33
Operating
activities
Net cash provided by operating activities during the
three-months ended June 30, 2007 resulted largely from net
income of $95 million, plus non-cash depreciation and
amortization charges of $213 million and non-cash
stock-based compensation expense of $41 million. Trade
accounts receivable decreased $141 million due to strong
cash collections. This was substantially offset by decreases in
deferred revenue, of $110 million, reflecting amortization
of deferred revenue into revenue during the quarter.
Net cash provided by operating activities during the June 2006
quarter resulted largely from net income of $101 million,
plus non-cash depreciation and amortization charges of
$207 million and non-cash stock-based compensation expense
of $37 million. Trade accounts receivable decreased
$144 million due to strong cash collections. This was
substantially offset by decreases in current liabilities,
reflecting payments of accounts payable, accrued compensation
and benefits, and income taxes.
Investing
Activities
Net cash used by investing activities during the three-months
ended June 30, 2007 was primarily the result of the use of
$841 million to fund the purchase price of Altiris, which
amount is net of Altiris cash and cash equivalents
balances, capital expenditures of $75 million and purchases
of short term investments of $301 million. This was offset
by proceeds from sales of short term investments of
$104 million.
Net cash provided by investing activities during the June 2006
quarter was primarily the result of $147 million of
proceeds from sales of available-for-sale securities
substantially offset by purchases of available-for-sale
securities of $13 million and capital expenditures of
$147 million, which included $81 million for the
purchase of two office buildings in Cupertino, California.
Financing
Activities
During the three-month period ended June 30, 2007, we
repurchased 25 million shares of our common stock, under
the plan announced in January 2007, at prices ranging from
$19.40 to $20.14 per share for an aggregate amount of
$500 million. During the three-month period ended
June 30, 2006, we repurchased 57 million shares at
prices ranging from $15.61 to $17.74 per share for an aggregate
amount of $891 million. As of June 30, 2007,
$2.0 billion remained authorized for future repurchases.
For further information regarding stock repurchase activity see
Part II, Item 2, Unregistered Sales of Equity
Securities and Use of Proceeds of this quarterly report and
Note 6 of the Notes to Condensed Consolidated Financial
Statements in this quarterly report, which information is
incorporated herein by reference.
In the three-months ended June 30, 2007 and 2006, we
received net proceeds of $62 million and $40 million,
respectively, from the issuance of our common stock through
employee stock plans.
In the June 2006 quarter, we issued the Senior Notes for net
proceeds of approximately $2.1 billion. We used
$891 million of the proceeds to repurchase shares of our
common stock. We also purchased hedges related to the Senior
Notes for $592 million and received proceeds of
$326 million from the sale of common stock warrants.
Contractual
Obligations
Convertible
senior notes
Holders of the Senior Notes may convert their Senior Notes prior
to maturity upon the occurrence of certain circumstances. Upon
conversion, we would pay the holder the cash value of the
applicable number of shares of Symantec common stock, 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 our option.
As of June 30, 2007, the conditions to convertibility of
the Senior Notes had not been met.
Purchase
obligations
We enter into purchase obligations in the normal course of our
business. There were no significant changes in our purchase
obligations during the three months ended June 30, 2007 as
compared to what was previously reported
34
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, 2007.
Development
agreement
During fiscal 2006, we entered into an agreement in connection
with the construction of, or refurbishments to, a building in
Culver City, California. Payment is contingent upon the
achievement of certain
agreed-upon
milestones. The remaining commitment under the agreement is
$70 million as of June 30, 2007.
Royalties
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. Certain royalty commitments have minimum
commitment obligations; however, as of June 30, 2007, all
such obligations are immaterial.
Leases
We lease office space in North America (principally in the
United States) and various locations throughout the world. There
were no significant changes in our operating lease commitments
during the three-months ended June 30, 2007 as compared to
what was previously reported 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, 2007.
Indemnification
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 maximum potential amount of
future payments we could be required to make under these
indemnification agreements is not limited; however, we have
directors and officers insurance coverage that reduces our
exposure and may enable us to recover a portion of any future
amounts paid. We believe the estimated fair value of these
indemnification agreements in excess of applicable insurance
coverage is minimal.
We provide limited product warranties and the majority of our
software license agreements contain provisions that indemnify
licensees of our software from damages and costs resulting from
claims alleging that our software infringes the intellectual
property rights of a third party. Historically, payments made
under these provisions have been immaterial. We monitor the
conditions that are subject to indemnification to identify if a
loss has occurred.
Uncertain
tax positions
Upon adoption of FIN 48 on April 1, 2007, we reflected
$6 million in current taxes payable and $350 million
in long-term taxes payable related to unrecognized tax benefits.
We also recorded additional long-term taxes payable of
$64 million in the three months ended June 30, 2007.
At this time, we are unable to make a reasonably reliable
estimate of the timing of payments in individual years beyond
the next twelve months due to uncertainties in the timing of the
commencement and settlement of potential tax audits and
controversies.
Norton
agreement
On June 20, 2007, the Company and Peter Norton amended the
Amended Agreement Respecting Certain Rights of Publicity dated
August 31, 1990, concerning Symantecs license to
Peter Nortons publicity rights. As a result of this
amendment the Company has recorded a long-term liability for the
net present value of the payments of $29 million with
$7 million due in the last three quarters of fiscal 2008,
$8 million in 2009, $6 million in 2010,
$4 million in 2011, $2 million in 2012, and an
immaterial amount thereafter.
35
Purchase
price adjustment
On December 1, 2006, we completed our acquisition of
Company-i Limited for $26 million in cash. The purchase
price was subject to an adjustment of up to $11 million in
cash if Company-i achieved certain billings targets by
March 31 or September 30, 2007 or September 30,
2008. During the June quarter, we determined that the billing
target was met as of June 29, 2007 and therefore recorded a
liability of approximately $12 million including the
effects of foreign exchange and booked an adjustment to
goodwill, in accordance with SFAS No. 141, Business
Combinations. We expect to make this payment during the
second quarter of fiscal 2008.
Huawei
Technologies Joint Venture
In May 2007, we signed an agreement to form a joint venture with
Huawei Technologies Co., Ltd. Upon the closing of the joint
venture, we will contribute storage and security software and
$150 million in cash in return for a 49% interest in the entity.
The joint venture is expected to close late in calendar year
2007, pending required regulatory and governmental approvals.
Recent
Accounting Pronouncements
Information with respect to Recent Accounting Pronouncements may
be found in Note 1 of Notes to Condensed Consolidated
Financial Statements in this
Form 10-Q,
which information is incorporated herein by reference.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We believe there have been no significant changes in our market
risk exposures during the three months ended June 30, 2007
as compared to what was previously disclosed in our Annual
Report on
Form 10-K
for the fiscal year ended March 31, 2007.
|
|
Item 4.
|
Controls
and Procedures
|
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer have
concluded, based on an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934, as amended) by our
management, with the participation of our Chief Executive
Officer and our Chief Financial Officer, that our disclosure
controls and procedures were effective as of the end of the
period covered by this report.
(b) Changes in Internal Control over Financial
Reporting
There were no changes in our internal control over financial
reporting during the quarter ended June 30, 2007 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
(c) Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and 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 our Company have
been detected.
36
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
Information with respect to this Item may be found in
Note 12 of Notes to Condensed Consolidated Financial
Statements in this
Form 10-Q,
which information is incorporated into this Item 1 by
reference.
A description of the risks associated with our business,
financial condition, and results of operations is set forth in
Part I, Item 1A, of our Annual Report on
Form 10-K
for the fiscal year ended March 31, 2007. There have been
no material changes in our risks from such description.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
Stock repurchases during the three-month period ended
June 30, 2007 were as follows:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Value of Shares That
|
|
|
|
|
|
|
|
|
|
As part of Publicly
|
|
|
May Yet Be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced Plans
|
|
|
Purchased Under the
|
|
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
or Programs
|
|
|
Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
March 31, 2007 to
April 27, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
500
|
|
April 28, 2007 to
May 25, 2007
|
|
|
16,512,505
|
|
|
$
|
19.68
|
|
|
|
16,512,505
|
|
|
$
|
175
|
|
May 25, 2007 to June 29,
2007
|
|
|
8,787,644
|
|
|
$
|
19.91
|
|
|
|
8,787,644
|
|
|
$
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,300,149
|
|
|
$
|
19.76
|
|
|
|
25,300,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 14, 2007, we announced that our board of directors
authorized an additional $2 billion share repurchase
program, with no scheduled expiration date. As of the date of
filing this quarterly report, we have not effected any
repurchases under this program. For information with regard to
our stock repurchase programs, including programs completed
during the period covered by this Report, see Note 7 of
Notes to Condensed Consolidated Financial Statements, which
information is incorporated herein by reference.
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Incorporated by Reference
|
|
|
Filed
|
|
Number
|
|
|
Exhibit Description
|
|
Form
|
|
|
File No.
|
|
|
Exhibit
|
|
|
Filing Date
|
|
|
Herewith
|
|
|
|
10.01
|
|
|
Amendment, dated June 20,
2007, to the Amended and Restated Agreement Respecting Certain
Rights of Publicity dated as of August 31, 1990, by and
between Peter Norton and Symantec Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.02
|
*
|
|
Form of FY08 Executive Annual
Incentive Plan Executive Officers other than Group
Presidents responsible for one of Symantecs business
segments
|
|
|
8-K
|
|
|
|
000-17781
|
|
|
|
10.02
|
|
|
|
05/07/07
|
|
|
|
|
|
|
10.03
|
*
|
|
Form of FY08 Executive Annual
Incentive Plan Group Presidents responsible for one
of Symantecs business segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.04
|
*
|
|
FY08 Long Term Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.05
|
*
|
|
Symantec Executive Retention Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
31.01
|
|
|
Certification of Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
31.02
|
|
|
Certification of Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
32.01
|
|
|
Certification of Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
32.02
|
|
|
Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
* |
|
Indicates a 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. |
38
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 of the Board and
Chief Executive Officer
James A. Beer
Executive Vice President and
Chief Financial Officer
Date: August 7, 2007
39
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
|
File
|
|
|
|
|
|
Filing
|
|
|
Filed
|
|
Number
|
|
|
Exhibit Description
|
|
Form
|
|
|
No.
|
|
|
Exhibit
|
|
|
Date
|
|
|
Herewith
|
|
|
|
10.01
|
|
|
Amendment, dated June 20,
2007, to the Amended and Restated Agreement Respecting Certain
Rights of Publicity dated as of August 31, 1990, by and
between Peter Norton and Symantec Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.02
|
*
|
|
Form of FY08 Executive Annual
Incentive Plan Executive Officers other than Group
Presidents responsible for one of Symantecs business
segments
|
|
|
8-K
|
|
|
|
000-17781
|
|
|
|
10.02
|
|
|
|
05/07/07
|
|
|
|
|
|
|
10.03
|
*
|
|
Form of FY08 Executive Annual
Incentive Plan Group Presidents responsible for one
of Symantecs business segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.04
|
*
|
|
FY08 Long Term Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
10.05
|
*
|
|
Symantec Executive Retention Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
31.01
|
|
|
Certification of Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
31.02
|
|
|
Certification of Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
32.01
|
|
|
Certification of Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
32.02
|
|
|
Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
* |
|
Indicates a 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. |