Symantec 1996 Annual Report Download - page 26

to rapid changes that can be expected to continue. Fu t u r e tech-
nology or market changes may cause certain products to become
obsolete more quickly than expected and thus may result in capi-
t a l i zed software write-offs and an increase in re q u i red inve n t o r y
re s e rves and, there f o r e, reduced gross margins and net income.
In addition, the modifications to computer software, including
the correction of software bugs, may result in significant inve n t o-
ry rew o rk costs, including the cost of replacing inve n t o ry in the
distribution channel.
Research and Development Expenses
Re s e a rch and development expenses increased 34% to $94.7 mil-
lion or 21% of net re venues in fiscal 1996 from $70.7 million or
16% of net re venues in fiscal 1995 and was $68.1 million or
17% of net re venues in fiscal 1994. The increase in re s e a r ch and
d e velopment expenses in fiscal 1996 as compared to fiscal 1995
was primarily the result of increased product development effort s
associated with Sy m a n t e c’s and De l r i n a’s development of new
Wi n d o ws 95 products. The increase in re s e a rch and deve l o p -
ment expenses in fiscal 1995 in absolute dollars as compared to
fiscal 1994 was principally due to an increase in the number and
scope of development projects undertaken by Delrina, including
localization of products for international markets and new pro d-
uct development in anticipation of the launch of Wi n d o ws 95,
offset in part by savings from the consolidation of product deve l-
opment efforts resulting from the acquisition of Central Po i n t .
Symantec believes increased re s e a r ch and development expen-
d i t u res will be necessary in order to remain competitive. T h e
Company expects re s e a rch and development expenses to incre a s e
in dollar amount but may decline as a percentage of net re ve n u e s
should net re venues increase more quickly than re s e a rch and
d e velopment expenses. While the Company believes its re s e a rc h
and development expenditures will result in successful pro d u c t
i n t roductions, including products being developed for Wi n d ow s
95 and Wi n d ow s N T, the uncertain outcome of software deve l -
opment projects means that increased re s e a r ch and deve l o p m e n t
e f f o r ts will not necessarily result in successful product intro d u c-
tions due to technical difficulties, market conditions, competitive
p r oducts and other factors, such as customer acceptance of new
operating systems.
Re s e a rch and development expenditures are charged to
o p e rations as incurred. Financial accounting rules re q u i r i n g
c a p italization of certain software development costs have not
materially affected the Company, except for amounts capitalize d
by Delrina prior to its acquisition by Symantec. Delrina did not
c a p i t a l i z e any software development costs in fiscal 1996 and cap-
i t a l i zed $6.3 million and $2.6 million in software deve l o p m e n t
costs in fiscal years 1995 and 1994, re s p e c t i ve l y. The re l a t e d
a m o rtization expense was $5.6 million, $4.0 million and $1.9
million in fiscal 1996, 1995 and 1994, re s p e c t i ve l y.
Sales and M arketing Expenses
Sales and marketing expenses increased 21% to $229.7 million
or 52% of net re venues in fiscal 1996 from $190.4 million or
44% of net re venues in fiscal 1995 and from $190.0 million or
47% of net re v enues in fiscal 1994. The increase in sales and
m a rketing expenses in fiscal 1996 as compared to fiscal 1995 was
principally due to an increase in marketing development expenses
and an increase in sales and marketing expenses primarily associ-
ated with the release of Sy m a n t e c’s Wi n d ows 95 products. T h e
d e c r ease in fiscal 1995 as a percent of net re venues as compare d
to fiscal 1994 was principally due to the elimination of duplicative
sales organizations subsequent to the acquisition of Central
Point, offset in part by increased sales and marketing expenses
associated with De l r i n a’s expansion in Eu ro p e .
Symantec believes substantial sales and marketing efforts are
essential to achieve re venue growth and to maintain and enhance
Sy m a n t e c ’s competitive position. Ac c o rd i n g l y, with the intro d u c-
t i o n of new and upgraded products, including products curre n t l y
being developed for Wi n d ow s 95 and Wi n d ow s N T, Sy m a n t e c
expects the expenses associated with these efforts to increase in doll a r
amount and to continue to constitute its most significant operating
expense. T h e re can be no assurance that these increased sales and
m a r keting efforts will be successful. Symantec believes that the
C o m p a n y’s sales and marketing expenses may decrease as ap e r c e n t a g e
of net re venues in the near term following the high expenses asso-
ciated with the launch of Wi n d ows 95 products but may incre a s e
as a percentage of net re venues should net re venues not incre a s e .
General and Administrative Expenses
In fiscal 1996, general and administrative expenses increased in
absolute dollars by 12% to $32.7 million or 7% of net re ve n u e s
f r om $29.4 million or 7% of net re venues in fiscal 1995, and
d e c r eased from $34.3 million or 9% of net re venues in fiscal 1994.
The increase in general and administrative expenses in absolute
dollars in fiscal 1996 as compared to fiscal 1995 was principally
due to significant general and administrative expenses incurred by
Delrina in the three month period ended September 30, 1995, as
well as certain legal fees incurred by Delrina. In the fourth quart e r
of fiscal 1996, general and administrative expenses decreased to
5% of net re venues from 8% in the fourth quarter of fiscal 1995.
This decrease resulted primarily from the elimination of duplicative
general and administrative functions subsequent to the acquisition
of Delrina. The decrease in fiscal 1995 as comp a r ed to fiscal 1994
was principally due to benefits resulting fro m the consolidation of
the general and administrative functions of Symantec and Central
Point. Subsequent to the acquisition of Central Point by
Symantec in fiscal 1995, various duplicative general and adminis-
t r a t i ve functions we r e eliminated as a result of the combination of
the companies. In addition, general and administrative expenses
d e c reased due to the settlement of two class action lawsuits in fiscal
1994 resulting in a decrease in legal expenses during fiscal 1995.
While future growth of the Company is expected to result in
an increase in the dollar amount of general and administrative
spending from current levels, the Company expects general and
administrative expenses to decrease as a percent of net revenues