-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OKCli2U/J+Fb8HGpwnXMk96+a5copS0yk2qzKrNqGOnflm3TqAmztSuoZakgOyB8 m9hWtgiFQisThpeoDo3FLA== /in/edgar/work/20000811/0000950149-00-001755/0000950149-00-001755.txt : 20000921 0000950149-00-001755.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950149-00-001755 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYBASE INC CENTRAL INDEX KEY: 0000768262 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 942951005 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19395 FILM NUMBER: 694770 BUSINESS ADDRESS: STREET 1: 6475 CHRISTIE AVE CITY: EMERYVILLE STATE: CA ZIP: 94608 BUSINESS PHONE: 5109223500 MAIL ADDRESS: STREET 1: 6475 CHRISTIE AVE STREET 2: 6475 CHRISTIE AVE CITY: EMERYVILLE STATE: CA ZIP: 94608 10-Q 1 e10-q.txt FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission File number 0-19395 SYBASE, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 94-2951005 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 6475 Christie Avenue, Emeryville, CA 94608 (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (510) 922-3500 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 [X] No [ ] On July 31, 2000, 89,019,133 shares of the Registrant's Common Stock, $.001 par value, were outstanding. 2 SYBASE, INC. FORM 10-Q QUARTER ENDED JUNE 30, 2000 INDEX
Page ---- Forward-Looking Statements 3 Part I: Financial Information Item 1: Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 4 (Unaudited) and December 31, 1999 Condensed Consolidated Statements of Operations for the three 5 months and six months ended June 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Cash Flows for the six months 6 ended June 30, 2000 and 1999 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2: Management's Discussion and Analysis of Financial Condition 18 and Results of Operations (Unaudited) Item 3: Quantitative and Qualitative Disclosures of Market Risk 33 Part II: Other Information Item 1: Legal Proceedings 35 Item 4: Submission of Matters to a Vote of Security Holders 35 Item 6: Exhibits and Reports on Form 8-K 35 Signatures 37 Exhibit Index 38
2 3 FORWARD-LOOKING STATEMENTS This document contains forward-looking statements that involve risk and uncertainties that could cause the actual results of Sybase, Inc. and its consolidated subsidiaries (Sybase, or the Company) to differ materially from those expressed or implied by such forward-looking statements. These risks include sales productivity, particularly in North America; possible disruptive effects of organizational changes; shifts in customer or market demand for the Company's products and services; public perception of the Company, its technology vision and future prospects; rapid technological changes; competitive factors; delays in scheduled product availability dates (which could result from various occurrences including development or testing difficulties, software errors, shortages in appropriately skilled software engineers and project management problems); interoperability of the Company's products with other software products, and other risks detailed from time to time in the Company's Securities and Exchange Commission filings. Expectations, forecasts, and projections that may be contained in this report are by nature forward-looking statements, and future results cannot be guaranteed. The words "anticipate," "believe," "estimate," "expect," "intend," "will," and similar expressions in this document, as they relate to Sybase and its management, may identify forward-looking statements. Such statements reflect the current views of Sybase with respect to future events and are subject to certain risks, uncertainties and assumptions. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false, or may vary materially from those described as anticipated, believed, estimated, intended or expected. The Company does not intend to update these forward-looking statements. 3 4 ITEM 1: FINANCIAL STATEMENTS SYBASE, INC. -------------------- CONDENSED CONSOLIDATED BALANCE SHEETS
June 30 December 31 (Dollars in thousands, except share and per share data) 2000 1999 (Unaudited) --------- ----------- Current assets: Cash and cash equivalents $ 214,578 $ 250,103 Short-term cash investments 59,181 59,094 --------- --------- Total cash, cash equivalents and short-term cash investments 273,759 309,197 Accounts receivable, net 194,941 182,708 Deferred income taxes 15,839 15,826 Other current assets 20,064 14,924 --------- --------- Total current assets 504,603 522,655 Long-term cash investments 66,808 43,702 Property, equipment and improvements, net 62,091 67,587 Deferred income taxes 25,236 25,238 Capitalized software, net 33,226 35,934 Goodwill and other purchased intangibles, net 169,400 24,528 Other assets 5,272 17,691 --------- --------- Total assets $ 866,636 $ 737,335 ========= ========= Current liabilities: Accounts payable $ 15,633 $ 8,349 Accrued compensation and related expenses 50,901 57,625 Accrued income taxes 35,543 40,253 Other accrued liabilities 96,627 101,876 Deferred revenue 198,613 187,323 --------- --------- Total current liabilities 397,317 395,426 Other liabilities 5,867 5,799 Commitments and contingent liabilities Stockholders' equity: Preferred stock, $0.001 par value, 8,000,000 shares authorized; none issued or outstanding -- -- Common stock, $0.001 par value, 200,000,000 shares authorized; 90,804,457 shares issued and 89,060,736 outstanding (1999-82,952,192 shares issued and 80,920,691 outstanding) 91 83 Additional paid-in capital 573,614 432,352 Accumulated deficit (51,006) (48,037) Accumulated other comprehensive loss (20,928) (16,426) Cost of 1,743,721 shares of treasury stock (1999-2,031,501 shares) (38,319) (31,862) --------- --------- Total stockholders' equity 463,452 336,110 --------- --------- Total liabilities and stockholders' equity $ 866,636 $ 737,335 ========= =========
See accompanying notes. 4 5 SYBASE, INC. -------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ------------------------- ----------------------- (In thousands, except per share data) 2000 1999 2000 1999 --------- --------- -------- --------- Revenues: License fees $ 110,872 $ 95,703 $221,541 $ 193,973 Services 123,179 114,484 239,279 224,482 --------- --------- -------- --------- Total revenues 234,051 210,187 460,820 418,455 Costs and expenses: Cost of license fees 10,697 8,492 21,524 20,788 Cost of services 61,329 52,110 122,114 106,152 Sales and marketing 83,915 77,177 167,183 155,049 Product development and engineering 31,467 35,385 63,159 72,563 General and administrative 17,763 17,736 35,282 34,787 Amortization of goodwill and other purchased intangibles 9,163 3,707 16,471 7,120 In-process research and development -- -- 8,000 -- Cost (reversals) of restructuring -- (5,619) -- (5,619) --------- --------- -------- --------- Total costs and expenses 214,334 188,988 433,733 390,840 --------- --------- -------- --------- Operating income 19,717 21,199 27,087 27,615 Interest income 4,378 3,112 8,330 6,399 Interest expense and other, net (150) 469 478 222 --------- --------- -------- --------- Income before income taxes 23,945 24,780 35,895 34,236 Provision for income taxes 10,536 10,480 15,794 14,061 --------- --------- -------- --------- Net income $ 13,409 $ 14,300 $ 20,101 $ 20,175 ========= ========= ======== ========= Basic net income per share $ 0.15 $ 0.17 $ 0.23 $ 0.25 ========= ========= ======== ========= Shares used in computing basic net income per share 89,249 82,191 87,914 81,986 ========= ========= ======== ========= Diluted net income per share $ 0.14 $ 0.17 $ 0.22 $ 0.24 ========= ========= ======== ========= Shares used in computing diluted net income per share 93,608 83,776 92,597 83,381 ========= ========= ======== =========
See accompanying notes. 5 6 SYBASE, INC. -------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30 ------------------------- (In thousands) 2000 1999 --------- --------- Cash and cash equivalents, beginning of year $ 250,103 $ 224,665 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 20,101 20,175 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 51,604 47,053 Write-off of in-process research and development 8,000 -- Write-off of assets in restructuring -- (390) (Gain) Loss on disposal of assets (50) 2,899 Deferred income taxes (11) (92) Changes in assets and liabilities: Accounts receivable (12,518) 35,494 Other current assets (5,140) (3,470) Accounts payable 3,950 (3,508) Accrued compensation and related expenses (8,119) (2,745) Accrued income taxes (4,717) 8,355 Other accrued liabilities (3,673) (16,978) Deferred revenues 10,577 (11,638) Other 37 52 --------- --------- Net cash provided by operating activities 60,041 75,207 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale cash investments (81,884) (103,007) Maturities of available-for-sale cash investments 53,673 9,843 Sales of available-for-sale cash investments 5,017 7,530 Business combinations, net of cash acquired (30,339) (8,047) Purchases of property, equipment and improvements (11,412) (8,480) Capitalized software development costs (8,572) (8,631) Decrease in other assets 10,960 6,961 --------- --------- Net cash used for investing activities (62,557) (103,831) CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in other current liabilities -- (182) Proceeds from issuance of common stock 300 4,703 Proceeds from the issuance of treasury stock 18,285 11,118 Purchases of treasury stock (47,810) (16,952) --------- --------- Net cash used for financing activities (29,225) (1,313) Effect of exchange rate changes on cash (3,784) (5,981) --------- --------- Net decrease in cash and cash equivalents (35,525) (35,918) Cash and cash equivalents, end of period 214,578 188,747 Cash investments, end of period 125,989 110,582 --------- --------- Total cash, cash equivalents, and cash investments, end of period $ 340,567 $ 299,329 ========= ========= Supplemental disclosures: Interest paid $ 307 $ 44 ========= ========= Income taxes paid $ 17,009 $ 7,362 ========= =========
See accompanying notes. 6 7 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation. The accompanying unaudited condensed consolidated financial statements include the accounts of Sybase, Inc. and its subsidiaries (Sybase, or the Company), and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the Company's consolidated financial position, results of operations, and cash flows as of and for the dates and periods presented. The condensed consolidated balance sheet as of December 31, 1999 has been prepared from the audited consolidated financial statements of the Company. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements included in its Annual Report for the year ended December 31, 1999. The results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of results for the entire fiscal year ending December 31, 2000. Certain previously reported amounts have been reclassified to conform to the current presentation format. 2. Business Combinations. On January 20, 2000, the Company acquired Home Financial Network, Inc. (HFN), an Internet financial services company specializing in the development of customized e-Finance Web-sites, in a transaction accounted for as a purchase. The total purchase cost was approximately $167.4 million, consisting of the following:
(In millions, except share amounts) Issuance of 7,817,471 Sybase shares $129.8 HFN stock options assumed 11.2 Cash 25.9 Merger costs, legal and accounting .5 ------ Total Purchase Consideration $167.4 ======
The estimated fair value of the common stock to be issued was based on the average closing price of the Sybase common stock on the two days before and after the acquisition was announced on December 1, 1999. The estimated fair value of the HFN options assumed, which will be exchanged for cash and Sybase options, was based on the Black-Scholes valuation model using the following assumptions: - Expected lives of 0.4 to 4.0 years - Expected volatility factor of 68.24% - Risk-free interest rate of 5.51% - Expected dividend rate of 0% The estimated excess of the purchase price over the fair value of the net assets acquired has been valued at $166.5 million. Of this excess, $20.0 million was allocated to the established customer list, $18.0 million was allocated to developed technology, $120.5 million was allocated to goodwill, and $8.0 million was allocated to in-process research and development based upon a 7 8 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) valuation prepared by an independent third-party appraiser. The amount allocated to in-process research and development was charged to expense as a non-recurring charge in the first fiscal quarter of 2000 since the in-process research and development had not yet reached technological feasibility and had no alternative future uses. The amounts allocated to the established customer list, the developed technology and the goodwill are being amortized on a straight-line basis over periods of 10 years, 6 years and 7 years, respectively. The following unaudited pro forma quarterly financial information presents the combined fiscal results of operations of Sybase and HFN as if the acquisition had occurred as of the beginning of 1999 and 2000, after giving effect to certain adjustments, including amortization of goodwill and other intangible assets, but excluding the non-recurring charge for the write-off of $8.0 million in acquired in-process research and development. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the two companies constituted a single entity during such periods.
Six Six Months Months Ended Ended (In thousands except for per share data) 6/30/00 6/30/99 -------- -------- Revenue $460,820 $419,799 Net income (loss) 15,805 5,502 Basic net income (loss) per share 0.18 0.06 Diluted net income (loss) per share 0.17 0.06
In March 1999, the Company paid $5.4 million for Convertible Secured Promissory Notes due December 31, 2002 issued by Demica PLC (Demica), a provider of a wholesale banking application using the Company's technology. The notes bear interest at 8 percent per annum and are convertible into 29.9 percent of the share capital of Demica. The Company accounts for its investment in this entity under the equity method of accounting. In February 1999, the Company acquired Data Warehouse Network (DWN), an Ireland-based, privately held provider of packaged, industry-specific business intelligence applications. Under terms of the acquisition agreement, the Company paid $2.7 million in cash for certain assets and assumed certain liabilities of DWN. In addition, pursuant to the terms of the agreement, the Company is obligated to make contingent payments based on certain agreed-upon performance criteria. The aggregate maximum additional amount payable over a three-year period is $5.3 million of which $1.8 million has been paid to date. The transaction was accounted for as a purchase. Substantially all of the amount paid was allocated to purchased software and intangible assets. The results of operations of DWN have not been material in relation to those of the Company and are included in the consolidated results of operations for periods subsequent to the acquisition date. 8 9 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Net income per share. Shares used in computing basic and diluted net income per share are based on the weighted average shares outstanding in each period, excluding treasury stock. Basic net income per share excludes any dilutive effects of stock options. Diluted net income per share includes the dilutive effect of the assumed exercise of stock options using the treasury stock method. The following table shows the computation of basic and diluted net income per share:
Three Three Six Six Months Months Months Months Ended Ended Ended Ended (In thousands, except per share data) 6/30/00 6/30/99 6/30/00 6/30/99 ------- ------- ------- ------- Net income $13,409 $14,300 $20,101 $20,175 Shares used in computing basic net income per share 89,249 82,191 87,914 81,986 Effect of dilutive securities - stock options 4,359 1,585 4,683 1,395 ------- ------- ------- ------- Shares used in computing diluted net income per share 93,608 83,776 92,597 83,381 Basic net income per share $ 0.15 $ 0.17 $ 0.23 $ 0.25 ======= ======= ======= ======= Diluted net income per share $ 0.14 $ 0.17 $ 0.22 $ 0.24 ======= ======= ======= =======
4. Comprehensive Income. The following table sets forth the calculation of comprehensive income for all periods presented:
Three Three Six Six Months Months Months Months Ended Ended Ended Ended (In thousands) 6/30/00 6/30/99 6/30/00 6/30/99 -------- -------- -------- -------- Net income $ 13,409 $ 14,300 $ 20,101 $ 20,175 Foreign currency translation losses (763) (3,903) (4,502) (5,947) -------- -------- -------- -------- Comprehensive income $ 12,646 $ 10,397 $ 15,599 $ 14,228 ======== ======== ======== ========
5. New Accounting Pronouncements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. All registrants are expected to apply the accounting and disclosures described in SAB 101. The Company is currently evaluating SAB 101 and has not completed its assessment of the impact of adoption. Any change in the Company's revenue recognition policy resulting from SAB 101 will be reported as a change in accounting principle in the quarter ending December 31, 2000. 9 10 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (Statement 133). Statement 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. In June 1999, the FASB issued Statement No.137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which amended Statement No. 133 by deferring the effective date to the fiscal year beginning after June 30, 2000. The Company is required to adopt Statement 133 for the year ending December 31, 2001. The Company has not determined the effect, if any, that adoption will have on its consolidated financial position or results of operations. The Company adopted Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2) and Statement of Position 98-4 "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" (SOP 98-4) as of January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue on software transactions and supersede Statement of Position 91-1, "Software Revenue Recognition". The adoption of SOP 97-2 and SOP 98-4 did not have a material impact on the Company's consolidated financial results. In December 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions" (SOP 98-9). SOP 98-9 amends SOP 98-4 to extend the deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning after March 15, 1999. The adoption of SOP 98-9 did not have a material impact on the Company's consolidated financial results. 6. Segment Information. The Company is organized into five separate business segments, each of which maintains financial accountability for its operating results, dedicated product development and engineering, sales and product marketing, partner relationship management and customer support teams. The Enterprise Solutions Division (ESD) delivers products, technical support and professional services required by businesses for developing and maintaining operational systems including e-Business infrastructures that allow companies to present a personalized, seamless integration of content, commerce and communities. The Mobile and Embedded Computing Division (MEC) provides solutions that deliver enterprise information and applications to any locations where business transactions occur, whether it be a self-service kiosk, a remote branch office, or in the field using a hand-held device for remote access. The Internet Applications Division (IAD) delivers a combination of technologies used in the development and deployment of complex Internet-enabled applications. The Business Intelligence Division (BID) delivers industry specific database management systems, warehouse design tools and central meta data management facilities that enable customers to develop business intelligence solutions that integrate and transform data from multiple data sources. Financial Fusion, Inc. (FFI), formerly HFN and now a wholly-owned subsidiary of the Company, delivers turnkey Internet banking solutions to financial institutions. (See Note 2 - Business Combinations). 10 11 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Company reports its ESD, MEC, IAD and BID divisions and FFI as reportable segments in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (Statement 131). The Company had four reportable segments in 1999: ESD, MEC, IAD and BID. The Company's Chief Operating Decision Maker (CODM), which is the President and Chief Executive Officer, evaluates performance based upon a measure of segment operating profit or loss which includes an allocation of common expenses, but excludes certain unallocated expenses. Segment revenue includes transactions between the segments. These revenues are transferred to the applicable segments less amounts retained which are intended to reflect the costs incurred by the transferring segment. Allocated common costs and expenses are allocated based on measurable drivers of expense. Unallocated expenses represent corporate expenditures that are not specifically allocated to the segments. The Company's CODM does not view segment results below operating profit (loss), and therefore, interest income, interest expense and other, net and the provision for income taxes are not broken out by segment. The Company does not account for or report to the CODM its assets or capital expenditures by segment. A summary of the segment financial information reported to the CODM for the three months ended June 30, 2000 is presented below:
Consolidated (In thousands) ESD IAD MEC BID FFI Elimination Total -------- ------- ------- ------- -------- ----------- ------------ Revenues: License fees $ 79,770 $15,170 $12,285 $ 132 $ 3,515 -- $110,872 Services 119,541 117 347 577 2,597 -- 123,179 -------- ------- ------- ------- -------- ------- -------- Direct revenues from external customers 199,311 15,287 12,632 709 6,112 -- 234,051 Intersegment revenues 697 6,818 9,945 4,791 285 (22,536) -- -------- ------- ------- ------- -------- ------- -------- Total revenues 200,008 22,105 22,577 5,500 6,397 (22,536) 234,051 Total allocated costs and expenses before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 172,823 16,629 16,957 7,531 11,307 (22,536) 202,711 -------- ------- ------- ------- -------- ------- -------- Operating income (loss) before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 27,185 5,476 5,620 (2,031) (4,910) -- 31,340 Amortization of goodwill and other purchased intangibles 1,867 984 21 1,189 5,102 -- 9,163 Amortization of purchased technology 393 -- -- -- 750 -- 1,143 -------- ------- ------- ------- -------- ------- -------- Operating income (loss) before unallocated costs 24,925 4,492 5,599 (3,220) (10,762) -- 21,034 Unallocated expense 1,317 -------- Operating income 19,717 Interest income, interest expense and other, net 4,228 -------- Income before income taxes $ 23,945 ========
11 12 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A summary of the segment financial information reported to the CODM for the three months ended June 30, 1999 is presented below:
Consolidated (In thousands) ESD IAD MEC BID Elimination Total -------- ------- ------- ------- ----------- ------------ Revenues: License fees $ 64,917 $17,103 $ 9,847 $ 3,836 -- $ 95,703 Services 114,278 -- -- 206 -- 114,484 -------- ------- ------- ------- ------- -------- Direct revenues from external customers 179,195 17,103 9,847 4,042 -- 210,187 Intersegment revenues 477 7,494 8,375 2,473 (18,819) -- -------- ------- ------- ------- ------- -------- Total revenues 179,672 24,597 18,222 6,515 (18,819) 210,187 Total allocated costs and expenses before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 156,181 20,591 13,305 7,600 (18,819) 178,858 -------- ------- ------- ------- ------- -------- Operating income (loss) before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 23,491 4,006 4,917 (1,085) -- 31,329 Amortization of goodwill and other purchased intangibles 2,679 852 12 164 -- 3,707 Amortization of purchased technology 393 -- -- -- -- 393 -------- ------- ------- ------- ------- -------- Operating income (loss) before unallocated costs 20,419 3,154 4,905 (1,249) -- 27,229 Unallocated expense 6,030 -------- Operating income 21,199 Interest income, interest expense and other, net 3,581 -------- Income before income taxes $ 24,780 ========
12 13 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A summary of the segment financial information reported to the CODM for the six months ended June 30, 2000 is presented below:
Consolidated (In thousands) ESD IAD MEC BID FFI Elimination Total -------- ------- -------- -------- -------- ----------- ----------- Revenues: License fees $164,150 $29,789 $ 22,986 $ 195 $ 4,421 -- $221,541 Services 233,140 226 486 633 4,794 -- 239,279 -------- ------- -------- -------- -------- -------- -------- Direct revenues from external customers 397,290 30,015 23,472 828 9,215 -- 460,820 Intersegment revenues 803 17,012 17,999 7,008 1,745 (44,567) -- -------- ------- -------- -------- -------- -------- -------- Total revenues 398,093 47,027 41,471 7,836 10,960 (44,567) 460,820 Total allocated costs and expenses before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 345,986 35,528 31,132 16,353 21,179 (44,567) 405,611 -------- ------- -------- -------- -------- -------- -------- Operating income (loss) before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 52,107 11,499 10,339 (8,517) (10,219) -- 55,209 Amortization of goodwill and other purchased intangibles 3,884 1,974 43 1,638 8,932 -- 16,471 Write off of in-process research and development -- -- -- -- 8,000 -- 8,000 Amortization of purchased technology 786 -- -- -- 1,333 -- 2,119 -------- ------- -------- -------- -------- -------- -------- Operating income (loss) before unallocated costs 47,437 9,525 10,296 (10,155) (28,484) -- 28,619 Unallocated expense 1,532 -------- Operating income 27,087 Interest income, interest expense and other, net 8,808 -------- Income before income taxes $ 35,895 ========
13 14 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A summary of the segment financial information reported to the CODM for the six months ended June 30, 1999 is presented below:
Consolidated (In thousands) ESD IAD MEC BID Elimination Total -------- ------- ------- -------- ----------- ------------ Revenues: License fees $139,139 $32,463 $18,409 $ 3,962 -- $193,973 Services 224,097 -- -- 385 -- 224,482 -------- ------- ------- -------- ------- -------- Direct revenues from external customers 363,236 32,463 18,409 4,347 -- 418,455 Intersegment revenues 777 15,690 15,529 5,350 (37,346) -- -------- ------- ------- -------- ------- -------- Total revenues 364,013 48,153 33,938 9,697 (37,346) 418,455 Total allocated costs and expenses before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 322,249 39,419 25,864 15,520 (37,346) 365,706 -------- ------- ------- -------- ------- -------- Operating income (loss) before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 41,764 8,734 8,074 (5,823) -- 52,749 Amortization of goodwill and other purchased intangibles 4,892 1,764 24 440 -- 7,120 Amortization of purchased technology 786 -- -- -- -- 786 -------- ------- ------- -------- ------- -------- Operating income (loss) before unallocated costs 36,086 6,970 8,050 (6,263) -- 44,843 Unallocated expense 17,228 -------- Operating income 27,615 Interest income, interest expense and other, net 6,621 -------- Income before income taxes $ 34,236 ========
7. Litigation. Following the Company's announcements on January 2, 1998 and January 21, 1998 regarding its preliminary results of operations for the quarter and year ended December 31, 1997, several class action lawsuits were filed against the Company and certain of its officers and directors in the United States District Court, Northern District of California (Northern California District Court). The complaints were similar and alleged violations of federal and state securities laws and requested unspecified monetary damages. A consolidated, amended class action complaint was served in June 1998 and named Sybase KK, the Company's Japanese subsidiary, and Yoshi Ogawa, the Company's former Japan country manager, as additional defendants. On January 27, 1998, a purported shareholder derivative action was filed in the Superior Court of the State of California, County of Alameda (Alameda County Superior Court). The complaint alleged breach of fiduciary duties by certain present and former officers and/or directors in connection with the underlying circumstances alleged in the securities class action complaints described above. Two similar derivative actions were also filed in Alameda County Superior Court, and the three derivative actions were consolidated. On April 15, 1998, a derivative 14 15 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) complaint was filed in the Northern California District Court. A second similar derivative complaint was also filed in the same court. These cases were dismissed by the Plaintiffs. In addition, a similar complaint was filed in the Chancery Court in Delaware. The parties agreed to stay the Delaware case in light of the California action. On April 18, 2000, the Company announced that it had agreed to settle the consolidated federal securities class action and the consolidated California shareholder derivative actions. The terms of the federal securities class actions settlement are subject to court approval. The terms of the settlement of the shareholder derivative actions were approved by the court on July 7, 2000. The Company believes the settlements will have no future financial impact on Sybase. Following the Company's announcement on April 3, 1995 of its preliminary results of operations for the quarter ended March 31, 1995, several class action lawsuits were filed against the Company and certain of its officers in the Northern California District Court. The complaints are similar and alleged violations of federal and state securities laws and requested unspecified monetary damages. A consolidated amended class action complaint was served in August 1995. On March 25, 1996, the Court denied Sybase's motion to dismiss the amended complaint in its entirety and granted the defendants' motion to dismiss certain individual defendants. The Company filed a motion for summary judgment. Prior to the judge ruling on the summary judgment, the parties agreed in April 1999 to settle the case for $14.8 million, with Sybase responsible for $1.5 million of such amount plus its accumulated legal expenses. The Company's insurers are responsible for the balance. Sybase and the insurers paid the settlement amount into an escrow account maintained by Sybase's outside attorneys pending approval of the settlement by the Court. After settlement was reached, the court ruled in favor of Sybase on the summary judgment motion and dismissed the case. The plaintiffs appealed, and the Ninth Circuit Court of Appeals vacated the judgment that dismissed the case, remanding the matter to the trial court for a hearing on the settlement agreement. The trial court approved the settlement on June 13, 2000. The settlement amount of $1.5 million, and the related legal expenses were accrued by the Company during 1998. The settlement amount was still held in escrow as of June 30, 2000. The Company is also a party to various legal disputes and proceedings arising from the ordinary course of business. In the opinion of management, resolution of those matters is not expected to have a material adverse effect on the consolidated financial position of the Company. However, depending on the amount and timing of such resolution, an unfavorable resolution of some or all of these matters could materially affect the Company's future results of operations or cash flows in a particular period. The Company believes it has adequately accrued for these matters at June 30, 2000. 8. Future Commitments. On February 2, 2000, the Board of Directors authorized the Company to repurchase up to $50.0 million of its outstanding common stock in open market transactions from time to time, subject to price and market conditions. This action increased the aggregate total authorized under the repurchase program to $150.0 million. 15 16 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On January 28, 2000, the Company entered into a 15-year non-cancelable lease of a new facility to be built in Dublin, California. The lessor has committed to securing funding to acquire the land and to build two buildings with a total of approximately 420,000 rentable square feet. The lease agreement provides for five major milestones that if not met within agreed upon dates, allow for termination of the lease agreement. Payments under this lease will commence after the successful completion of building A of the project, no earlier than May 1, 2001. The Company has the option to renew the lease for up to two five-year extensions, subject to certain conditions. The base rent shall be increased by four percent each year, commencing on the month following the anniversary of the first completion date and thereafter on each anniversary date of the adjustment date. The lease generally requires Sybase to pay operating costs, including property taxes, insurance and maintenance in addition to ordinary operating expenses (such as utilities). The Company has not entered into an agreement to purchase the facilities at the end of the initial lease or at the end of either five-year lease extension. Future minimum payments under the lease agreement are as follows (dollars in thousands):
Year Ending December 31 2001 $ 5,200 2002 10,608 2003 11,302 2004 11,474 2005 11,933 Thereafter 157,728 -------- Total minimum lease payments $208,245 ========
9. Restructuring. In February 1998, the Company announced and began to implement a restructuring plan (the 1998 Plan) aimed at improving productivity per employee, including reductions in sales and marketing, and product development and engineering expenses. The Company's goal was to significantly reduce its annual operating expenses by realigning the Company's resources around its core product initiatives. The 1998 Plan included estimated restructuring charges of $70.0 million to be incurred in 1998. The 1998 Plan included the termination of at least 1,000 employees, the termination of certain product lines, and the consolidation or closure of certain facilities and subsidiaries. As a result of the 1998 Plan, the Company terminated approximately 1,100 employees, consolidated or closed more than 45 facilities worldwide, abandoned certain property, equipment and improvements (principally leasehold improvements and computer hardware and software) wrote off costs of terminating certain product lines, and closed down subsidiaries in Mexico, Thailand, Chile, Peru and Venezuela. The Company has substantially completed all actions associated with its restructuring and believes that it has achieved the desired results. 16 17 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table summarizes the activity related to the restructuring reserve at June 30, 2000:
Accrued Liabilities Accrued Liabilities at Amounts At (In thousands) 12/31/99 paid 6/30/00 ------------------- ------- ------------------- Termination payments to employees and other related costs $ 442 $235 $ 207 Lease cancellations and commitments 1,296 515 781 Other 372 -- 372 ------ ---- ------ Total $2,110 $750 $1,360 ====== ==== ======
The remaining restructuring reserve primarily relates to certain lease payments contractually required of the Company on certain closed facilities, net of associated sublease amounts, and certain remaining termination benefits payable to employees terminated as part of the 1998 Plan. The leases expire at various dates through 2003 and substantially all the remaining termination benefits are anticipated to be paid during 2000. 10. Costs (Reversals) of Restructuring. The Company has assessed the status of the restructure accrual at the end of each quarter since the restructure actions were last taken in December 1998. During the three months ended June 30, 1999, the Company reversed by credit to operating expenses $5.6 million of restructuring costs related to the 1998 plan. The reversals included $1.8 million related to termination payments to employees and other related costs; $3.1 million related to lease cancellations and commitments; and $0.7 million of legal and other fees. The significant components of the reversal to the accrual for termination payments to employees and other related costs included: termination payments due to employees who were terminated as part of the 1998 Plan, which were not claimed by the affected employees or were not utilized because the employee did not stay a specified period to qualify for the benefits, and termination payments due to employees who were terminated as part of the 1998 Plan but were asked to stay with the Company to fill open positions. The significant components of the reversal relating to the accrual for lease cancellations and commitments included accruals, associated with 20 locations, where the Company was able to sublet certain closed facilities earlier than anticipated or was able to negotiate a settlement with the landlord for the termination of the leases on certain closed facilities for an amount less than the amount provided in the 1998 Plan. During the six months ended June 30, 2000 no new information has arisen which warranted a reversal of the accrual. 17 18 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
REVENUES (DOLLARS IN MILLIONS) Three Months Three Months Percent Six Months Six Months Percent Ended 6/30/00 Ended 6/30/99 Change Ended 6/30/00 Ended 6/30/99 Change ------------- ------------- ------- ------------- ------------- ------- License fees $110.9 $ 95.7 16% $221.5 $194.0 14% Percentage of total revenues 47% 46% 48% 46% Services $123.2 $114.5 8% $239.3 $224.5 7% Percentage of total revenues 53% 54% 52% 54% Total revenues $234.1 $210.2 11% $460.8 $418.5 10%
Total revenues for the three months ended June 30, 2000 increased 11 percent to $234.1 million as compared to $210.2 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, total revenues increased 10 percent to $460.8 million as compared to $418.5 million for the six months ended June 30, 1999. License fees revenues increased 16 percent to $110.9 million for the three months ended June 30, 2000 as compared to $95.7 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, license fees revenues increased 14 percent to $221.5 million as compared to $194.0 million for the six months ended June 30,1999. The increase in license fees revenues during the quarter and year to date is primarily due to an increase in ESD revenues (primarily enterprise database products), an increase in MEC revenues (primarily mobile database products), and the FFI revenues primarily associated with the Company's acquisition of HFN (See Note 2 to the Condensed Consolidated Financial Statements, Part I, Item 1). The increases in license revenues generated by the ESD and MEC divisions were partially offset by a decrease in the license revenues of the BID (primarily data warehouse products) and IAD (primarily PowerBuilder(R) products) divisions. Whether the increase in license fees revenues continues will depend, in part, on the Company's ability to enhance existing products and to introduce, on a timely basis, new products that meet customer requirements. See "Future Operating Results." Services revenues increased 8 percent to $123.2 million for the three months ended June 30, 2000 as compared to $114.5 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, services revenues increased 7 percent to $239.3 million as compared to $224.5 million in the six months ended June 30, 2000. Services revenues consist primarily of consulting, education and other services related to the development and deployment of applications using the Company's software products, and product support and maintenance fees. The increase in services revenues during the quarter and year to date is primarily due to an increase in product support and maintenance fees as well as an increase in consulting revenue primarily related to FFI. 18 19 Services revenues as a percentage of total revenues decreased to 53 percent and 52 percent for the three and six months ended June 30, 2000, respectively, as compared to 54 percent for the three and six months ended June 30, 1999.
GEOGRAPHICAL REVENUES (DOLLARS IN MILLIONS) Three Months Three Months Percent Six Months Six Months Percent Ended 6/30/00 Ended 6/30/99 Change Ended 6/30/00 Ended 6/30/99 Change ------------- ------------- ------- ------------- ------------- ------- North American $146.2 $125.8 16% $280.9 $252.8 11% Percentage of total revenues 62% 60% 61% 60% International European $ 57.4 $ 57.1 1% $121.7 $113.9 7% Percentage of total revenues 25% 27% 26% 27% Intercontinental $ 30.5 $ 27.3 12% $ 58.2 $ 51.8 12% Percentage of total revenues 13% 13% 13% 13% Total International $ 87.9 $ 84.4 4% $179.9 $165.7 9% Percentage of total revenues 38% 40% 39% 40% Total revenues $234.1 $210.2 11% $460.8 $418.5 10%
North American revenues (United States and Canada) increased 16 percent to $146.2 million for the three months ended June 30, 2000, as compared to $125.8 million for the three months ended June 30, 1999. North American revenues increased 11 percent to $280.9 million in the six months ended June 30, 2000 as compared to $252.8 million for the six months ended June 30, 1999. International revenues increased 4 percent and 9 percent for the three and six months ended June 30, 2000, respectively, to $87.9 million and $179.9 million, from $84.4 million and $165.7 million, respectively, for both comparable periods of 1999. European revenues increased 1 percent and 7 percent for the three and six months ended June 30, 2000, respectively, to $57.4 million and $121.7 million, from $57.1 million and $113.9 million, respectively, for both comparable periods of 1999. Intercontinental revenues (Japan, Asia Pacific and South America) increased 12 percent for the three and six months ended June 30, 2000, to $30.5 million and $58.2 million, from $27.3 million and $51.8 million, respectively, for both comparable periods of 1999. The increase in North America revenues for the three and six months ended June 30, 2000 was primarily attributable to an increase in revenues of the ESD division and the revenues of the FFI division. The increase in European revenues for the three month period ended June 30, 2000 was primarily related to an increase in revenues of the MEC and ESD divisions partially offset by decreased revenues in the IAD division. The increase in European revenues for the six month period ended June 30, 2000 primarily related to an increase in revenues of the MEC and IAD divisions. The increase in Intercontinental revenues for the three and six months ended June 30, 2000 was primarily related to an increase in revenues of the ESD and MEC divisions. International revenues comprised 38 percent and 39 percent of total revenues for the three and six months ended June 30, 2000, respectively, compared to 40 percent for the three and six months ended June 30, 1999. 19 20 In Europe and the Intercontinental region, most revenues and expenses are denominated in local currencies. The effect of foreign currency exchange rate changes on revenues was not material for the three and six months ended June 30, 2000 and 1999. Although the Company takes into account changes in exchange rates over time in its pricing strategy, the Company's business and results of operations could be materially and adversely affected by fluctuations in foreign currency exchange rates. Changes in foreign currency exchange rates, the strength of local economies, and the general volatility of worldwide software markets may result in a higher or lower proportion of international revenues as a percentage of total revenues in the future. For additional risks associated with currency fluctuations, see "Future Operating Results" and "Quantitative and Qualitative Disclosures of Market Risk," Part I, Item 3.
COSTS AND EXPENSES (DOLLARS IN MILLIONS) Three Three Six Six Months Ended Months Ended Percent Months Ended Months Ended Percent 6/30/00 6/30/99 Change 6/30/00 6/30/99 Change ------------ ------------ ------- ------------ ------------ ------- Cost of license fees $10.7 $ 8.5 26% $ 21.5 $ 20.8 4% Percentage of license fees revenues 10% 9% 10% 11% Cost of services $61.3 $52.1 18% $122.1 $106.2 15% Percentage of services revenues 50% 46% 51% 47% Sales and marketing $83.9 $77.2 9% $167.2 $155.0 8% Percentage of total revenues 36% 37% 36% 37% Product development and engineering $31.5 $35.4 (11%) $ 63.2 $ 72.6 (13%) Percentage of total revenues 13% 17% 14% 17% General and administrative $17.8 $17.7 0% $ 35.3 $ 34.8 1% Percentage of total revenues 8% 8% 8% 8% Amortization of goodwill and other purchased intangibles $ 9.2 $ 3.7 147% $ 16.5 $ 7.1 131% Percentage of total revenues 4% 2% 4% 2% In-process research and development -- -- -- $ 8.0 -- * Percentage of total revenues -- -- 2% -- Cost (reversal) of restructuring -- $(5.6) * -- $ (5.6) * Percentage of total revenues -- (3%) -- (1%)
- ---------------- * Not meaningful Cost of License Fees. Cost of license fees consists primarily of product costs (media and documentation), amortization of purchased software and capitalized software development costs, and third-party royalty costs. These costs were $10.7 million and $21.5 million for the three and six months ended June 30, 2000, respectively, as compared to $8.5 million and $20.8 million for the same periods in 1999. Such costs were 10 percent of license fees revenues for the three and six months ended June 30, 2000, as compared to 9 percent and 11 percent for the same periods in 20 21 1999. The increase in the cost of license fees in the three and six months ended June 30, 2000 as compared to the same periods in 1999 was primarily due to increases in amortization of capitalized software costs and the amortization of purchased technology acquired in the HFN transaction. This increase was partially offset by a decrease in royalties payable to third parties. Amortization of capitalized software costs included in cost of license fees was $5.8 million and $11.4 million for the three and six months ended June 30, 2000, respectively, as compared to $4.9 million and $9.6 million for the same periods in 1999. The increase in amortization of capitalized software costs was primarily related to Adaptive Server(R) Enterprise 12.0, PowerBuilder(R) 7.0, and Jaguar CTS(TM) 3.0 and 3.5. Cost of Services. Cost of services consists primarily of maintenance, consulting and education expenses and, to a lesser degree, services-related product costs (media and documentation). These costs were $61.3 million and $122.1 million for the three and six months ended June 30, 2000, respectively, as compared to $52.1 million and $106.2 million for the comparable periods of 1999. These costs were 50 percent and 51 percent of services revenues for the three months and six months ended June 30, 2000, as compared to 46 percent and 47 percent for the same periods in 1999. The increase in cost of services in absolute dollars and as a percentage of services revenues for both comparable periods is primarily due to an increase in the number of consulting personnel located in North America (partially attributable to the acquisition of HFN), and market driven increases in the labor costs associated with consulting personnel. Sales and Marketing. Sales and marketing expenses increased 9 percent and 8 percent to $83.9 million and $167.2 million for the three and six months ended June 30, 2000, respectively, as compared to $77.2 million and $155.0 million for the same periods in 1999. These costs were at 36 percent of total revenues for the three and six months ended June 30, 2000 as compared to 37 percent for the same periods in 1999. The increase in sales and marketing expenses in absolute dollars for both comparable periods is primarily due to sales expenses associated with increased license fees revenues and costs, and certain marketing programs. The increase in sales and marketing expense was partially offset by a decrease in allocated common costs. The Company allocates various common costs including certain legal expenses, accounting, human resources, external consulting, employee benefits, and facilities costs to sales and marketing, product development and engineering, and general and administrative expenses. Product Development and Engineering. Product development and engineering expenses (net of capitalized software development costs) decreased 11 percent and 13 percent to $31.5 million and $63.2 million for the three and six months ended June 30, 2000, respectively, as compared to $35.4 million and $72.6 million for the same periods in 1999. These costs as a percentage of total revenues were 13 percent and 14 percent for the three and six months ended June 30, 2000, respectively, and 17 percent for the same periods in 1999. The decrease in product development and engineering in absolute dollars and as a percentage of total revenues for both comparable periods is primarily due to a decrease in allocated common costs. The Company capitalized approximately $4.9 million and $8.6 million of software development costs for the three and six months ended June 30, 2000, respectively, as compared to $4.5 million and $8.6 million for the same periods in 1999. For the six months ended June 30, 2000, capitalized software costs included costs incurred for the development of the Sybase(R) Enterprise Portal, Adaptive Server(R) Enterprise 12.5, Adaptive Server IQ 12.4.2 and 12.5, DirectConnect(TM) 12.0 and 12.5, Enterprise Application Server, and MainframeConnect(TM) 12.0 and 12.5. 21 22 The Company believes that product development and engineering expenditures are essential to technology and product leadership and expects product development and engineering expenditures to continue to be significant, both in absolute dollars and as a percentage of total revenues. General and Administrative. General and administrative expenses were $17.8 million and $35.3 million for the three and six months ended June 30, 2000, respectively, as compared to $17.7 million and $34.8 million for the same periods in 1999. General and administrative expenses represented 8 percent of total revenues for the three and six months ended June 30, 2000 and 1999. The slight increase in general and administrative expenses in absolute dollars for both comparable periods is primarily due to the costs associated with FFI. Amortization of Goodwill and Other Purchased Intangibles. Amortization of goodwill and other purchased intangibles were $9.2 million and $16.5 million for the three and six months ended June 30, 2000, respectively, as compared to $3.7 million and $7.1 million for the same periods in 1999. These costs were 4 percent of total revenues for the three and six months ended June 30, 2000, and 2 percent for the same periods in 1999, respectively. The increase in absolute dollars is primarily due to amortization of goodwill and established customer list associated with the HFN acquisition (See Note 2 to Condensed Consolidated Financial Statements, Part I, Item 1). In-process Research and Development. In connection with the acquisition of HFN in the quarter ended March 31, 2000, the Company allocated $8.0 million of the total purchase price of approximately $167.4 million to purchased in-process research and development. As part of the process of analyzing this acquisition, the decision was made to buy technology that had not yet been commercialized rather than develop the technology internally. This decision was based on factors such as the amount of time and costs it would take to bring the technology to market. HFN is a software company involved in the development of technologies that enable financial institutions to deliver their services to customers via the Internet. At the acquisition date, HFN was conducting development and qualification activities related to a suite of products encompassing bill presentment, small business functions, alternative service delivery methods and related underlying software technology. At the date of the acquisition, the in-process research and development projects had not yet reached technological feasibility and had no alternative future uses. Accordingly, the value allocated to these projects was immediately expensed at acquisition. The Company estimated the fair value of in-process research and development using an income approach. This involved estimating the fair value of the in-process research and development by determining the present value of the estimated after-tax cash flows expected to be generated by the purchased in-process research and development, using risk adjusted discount rates. The selection of the discount rate was based on a weighted average cost of capital, adjusted to reflect risks associated with the useful life of each technology, profitability levels of each technology, the uncertainty of technology advances known at the time, and each technologies' degree of completion. Projected future net cash flows attributable to HFN's in-process research and development, assuming successful development, were discounted to net present value using a discount rate of 20%. The Company believes that the estimated in-process research and development amount so determined represents fair value and does not exceed the amount another third party would pay for the projects. 22 23 Revenue estimates were based on relevant market size and growth factors, expected industry trends, individual product sales cycles and the estimated life of each product's underlying technology. The analysis of the in-process technology was determined by incorporating revenue related to the expected evolution of the technology over time. Once developed, the estimated lifecycle of the product suite was estimated to be approximately 5 to 7 years. As a whole, HFN was expected to exhibit compound annual growth of approximately 38 percent in the period from 2000 through 2007. It was projected that the suite of products resulting from the in-process research and development efforts would begin generating revenue in 2000 and positive cash flow in 2001. Operating expenses included selling, general and administrative expenses, and research and development expenses. Total research and development was divided into: (i) the costs to complete the in-process research and development projects and (ii) costs for developed products that had already been introduced to the market, including product maintenance. Costs to complete in-process projects were estimated by management. These costs were allocated based on an analysis of expected project completion dates. The resultant target margin that HFN expected to achieve from the in-process products was approximately 37 percent. Profitability was expected to be significantly lower in the first several years of the product suite's lifecycle compared to the latter years due to a higher level of sales and marketing expenses as a percentage of revenue in the earlier years. The financial forecasts only included results that were projected to be generated by HFN on a standalone basis. Synergies resulting from the combination of Sybase were not incorporated into the analysis. To properly analyze the research and development efforts that had been accomplished to date and exclude the effort to be completed on the development efforts underway, it was necessary to adjust the overall forecasts associated with the research and development projects to reflect only the accomplishments made as of the date of the acquisition towards the ultimate completion of the in-process R&D projects. The relative contribution made on the research and development efforts was assessed based on a variety of factors including absolute development time (costs) incurred to date, management estimates, and a detailed analysis of each of the primary tasks completed compared to the tasks required to complete the efforts and the associated risks. Overall, HFN's in-process research and development projects were estimated to be approximately 75% complete. HFN estimated that the projects would be completed in March 2000, after which time it expected to begin generating economic benefits from the completed projects. As of the valuation date, approximately 86 man months totaling $650,000 had been expended on the in-process research and development projects. In total, costs to complete HFN's in-process research and development were expected to be approximately $150,000 and require 23 man months of work. Completion of these projects was expected to require significant efforts involving continued software development as well as the testing and re-qualification efforts required to turn a new-to-the world software suite into a set of bug-free, commercial-ready products. These remaining tasks involved substantial risk due to the complex nature of the activities involved. Historically, many of HFN's in-process research and development projects have required rework and additional expenditures in comparable stages of development. The research and development efforts described above are substantially complete and actual results to date have been consistent, in all material respects, with our assumptions at the time of the acquisitions. Costs (Reversals) of Restructuring. In February 1998, the Company announced and began to implement a restructuring plan (the 1998 Plan) aimed at improving productivity per employee, including reductions in sales and marketing, and product development and engineering expenses. 23 24 The Company's goal was to significantly reduce its annual operating expenses by realigning the Company's resources around its core product initiatives. The 1998 Plan included estimated restructuring charges of $70.0 million to be incurred in 1998. The 1998 Plan included the termination of at least 1,000 employees, the termination of certain product lines, and the consolidation or closure of certain facilities and subsidiaries. As a result of the 1998 Plan, the Company terminated approximately 1,100 employees, consolidated or closed more than 45 facilities worldwide, abandoned certain property, equipment and improvements (principally leasehold improvements and computer hardware and software), wrote off costs of terminating certain product lines, and closed down subsidiaries in Mexico, Thailand, Chile, Peru and Venezuela. The Company has substantially completed all actions associated with its restructuring and believes that it has achieved the desired results. The Company has assessed the status of the restructure accrual at the end of each quarter since the restructure actions were last taken in December 1998. During the three months ended June 30, 1999, the Company reversed by credit to operating expenses $5.6 million of restructuring costs related to the 1998 plan. The reversals included $1.8 million related to termination payments to employees and other related costs; $3.1 million related to lease cancellations and commitments; and $0.7 million of legal and other fees. The significant components of the reversal to the accrual for termination payments to employees and other related costs included: termination payments due to employees who were terminated as part of the 1998 Plan, which were not claimed by the affected employees or were not utilized because the employee did not stay a specified period to qualify for the benefits, and termination payments due to employees who were terminated as part of the 1998 Plan but were asked to stay with the Company to fill open positions. The significant components of the reversal relating to the accrual for lease cancellations and commitments included accruals, associated with 20 locations, where the Company was able to sublet certain closed facilities earlier than anticipated or was able to negotiate a settlement with the landlord for the termination of the leases on certain closed facilities for an amount less than the amount provided in the 1998 Plan. During the six months ended June 30, 2000 no new information has arisen which warranted a reversal of the accrual.
OPERATING INCOME (DOLLARS IN MILLIONS) Three Months Three Months Percent Six Months Six Months Percent Ended 6/30/00 Ended 6/30/99 Change Ended 6/30/00 Ended 6/30/99 Change ------------- ------------- ------- ------------- ------------- ------- Operating income $19.7 $21.2 (7%) $27.1 $27.6 (2%) Percentage of total revenues 8% 10% 6% 7% Operating income exclusive of cost (reversals) of restructuring $19.7 $15.6 27% $27.1 $22.0 23% Percentage of total revenues 8% 7% 6% 5%
Operating income, was $19.7 million and $27.1 million for the three and six months ended June 30, 2000, respectively, compared to operating income (exclusive of reversals of restructuring charges) of $15.6 million and $22.0 million for the same periods in 1999. The increase in operating income for both comparable periods is primarily due to an increase in total revenues which was partially offset by an increase in operating expenses including expenses associated with the amortization of goodwill and established customer lists, the write-off of in-process 24 25 research and development and the amortization of purchased technology relating to the acquisition of HFN.
OTHER INCOME (EXPENSE), NET (DOLLARS IN MILLIONS) Three Months Three Months Percent Six Months Six Months Percent Ended 6/30/00 Ended 6/30/99 Change Ended 6/30/00 Ended 6/30/99 Change ------------- ------------- ------- ------------- ------------- ------- Interest income $ 4.4 $3.1 41% $8.3 $6.4 30% Percentage of total revenues 2% 1% 2% 2% Interest expense and other, net $(0.2) $0.5 * $0.5 $0.2 115% Percentage of total revenues * * * *
- --------------- * Not meaningful Interest income increased 41 percent and 30 percent to $4.4 million and $8.3 million for the three and six months ended June 30, 2000, respectively, compared to $3.1 million and $6.4 million for the same periods in 1999. Interest income consists primarily of interest earned on investments. The increase in interest income for both comparable periods is primarily due to the increase in the average-invested cash balances. Interest expense and other, net was ($0.2) million and $0.5 million for the three and six months ended June 30, 2000, respectively, compared to $0.5 million and $0.2 million for the same periods in 1999. Interest expense and other, net consists primarily of interest expense on capital lease obligations, bank fees and net gains and losses resulting from the Company's foreign currency transactions and related hedging activities, including the cost of hedging foreign currency exposures.
PROVISION FOR INCOME TAXES (DOLLARS IN MILLIONS) Three Months Three Months Percent Six Months Six Months Percent Ended 6/30/00 Ended 6/30/99 Change Ended 6/30/00 Ended 6/30/99 Change ------------- ------------- ------- ------------- ------------- ------- Provision for income taxes $10.5 $10.5 1% $15.8 $14.1 12%
- --------------- * Not meaningful The Company recorded income tax provisions of $10.5 million and $15.8 million for the three and six months ended June 30, 2000, respectively, as compared to $10.5 million and $14.1 million for the same periods in 1999. The income tax provisions for these periods are primarily the result of tax on earnings generated from operations and withholding taxes on revenues in certain international jurisdictions. The Company had net deferred tax assets of $41.1 million at June 30, 2000. The deferred tax assets were net of a valuation allowance of $20.6 million. Realization of the Company's net 25 26 deferred tax assets is dependent upon the Company generating sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences and from tax credit carryforwards. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced and any such adjustments could have a material adverse impact on the Company's effective tax rate and results of operations in future periods.
NET INCOME PER SHARE (DOLLARS AND SHARES IN MILLIONS) Three Months Three Months Percent Six Months Six Months Percent Ended 6/30/00 Ended 6/30/99 Change Ended 6/30/00 Ended 6/30/99 Change ------------- ------------- ------- ------------- ------------- ------- Net income $13.4 $14.3 (6%) $20.1 $20.2 0% Percentage of total revenues 6% 7% 4% 5% Basic net income per share $ 0.15 $ 0.17 (12%) $ 0.23 $ 0.25 (8%) Diluted net income per share $ 0.14 $ 0.17 (18%) $ 0.22 $ 0.24 (8%) Shares used in computing basic net income per share 89.2 82.2 9% 87.9 82.0 7% Shares used in computing diluted net income per share 93.6 83.8 12% 92.6 83.4 11%
- --------------- * Not meaningful The Company reported net income of $13.4 million and $20.1 million for the three and six months ended June 30, 2000, respectively, as compared to net income of $14.3 million and $20.2 million for the same periods in 1999. The decrease in net income for both comparable periods is related to the reversal of restructuring charges in 1999 and the increase in 2000 operating expenses, which was partially offset by an increase in total revenues and interest income and expense and other, net. The increase in operating expenses is primarily related to the amortization of various intangibles, and the write-off of in-process research and development acquired in connection with the acquisition of HFN, and the operating expenses of HFN. Basic net income per share was $0.15 and $0.23 for the three and six months ended June 30, 2000, respectively, as compared to $0.17 and $0.25 for the same periods in 1999. Diluted net income per share was $0.14 and $0.22 for the three and six months ended June 30, 2000, respectively, as compared to $0.17 and $0.24 for the same periods in 1999. Shares used in computing basic net income per share increased 9 percent and 7 percent for the three and six months ended June 30, 2000, respectively, as compared to the same periods in 1999 primarily due to the shares issued for the acquisition of HFN, (See Note 2 to Condensed Consolidated Financial Statements, Part I, Item 1), the exercise of employee stock options and the increase of shares outstanding under the employee stock purchase plan. Shares used in computing diluted net income per share increased 12 percent and 11 percent for the three months ended June 30, 2000, respectively, as compared to the same periods in 1999 due primarily to the reasons stated above. 26 27
LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN MILLIONS) Six Months Six Months Percent Ended 6/30/00 Ended 6/30/99 Change ------------- ------------- ------- Working capital $107.3 $ 80.1 34% Cash, cash equivalents and cash investments $340.6 $299.3 14% Net cash provided by operating activities $ 60.0 $ 75.2 (20%) Net cash used for investing activities $ 62.6 $103.8 (40%) Net cash used for financing activities $ 29.2 $ 1.3 *
- --------------- * Not meaningful Net cash provided by operating activities was $60.0 million for the six months ended June 30, 2000 compared to $75.2 million for the six months ended June 30, 1999. Net cash provided by operating activities reflects an increase in accounts receivable of $12.5 million for the six months ended June, 2000 as compared to a decrease of $35.5 million for the six months ended June 30, 1999. Net cash provided by operating activities also reflects an increase in deferred revenue of $10.6 million for the six months ended June 30, 2000 compared to a decrease of $11.6 million for the six months ended June 30, 1999. Depreciation and amortization charges, which are included in the net income, but do not require the use of cash, amounted to $51.6 million for the six months ended June 30, 2000 compared to $47.1 million for the six months ended June 30, 1999. This increase in depreciation and amortization was primarily due to the amortization of goodwill and other purchased intangibles in connection with the HFN acquisition, excluding the write off of in-process research and development for HFN which resulted in a non-cash charge of $8.0 million in the first quarter. (See Note 2 to Condensed Consolidated Financial Statements, Part I, Item 1). Net cash used for investing activities was $62.6 million for the six months ended June 30, 2000 compared to $103.8 million for the six months ended June 30, 1999. Investing activities included: capital expenditures of $11.4 million for the six months ended June 30, 2000 compared to $8.5 million in the same period for 1999; $30.3 million for business combinations, net of cash acquired, for the six months ended June 30, 2000 compared to $8.0 million for the six months ended June 30, 1999; and cash used for net purchases of cash investments of $23.2 million for the six months ended June 30, 2000 compared to $85.6 million for the same period of 1999. Net cash used for financing activities was $29.2 million for the six months ended June 30, 2000 compared to $1.3 million for the six months ended June 30, 1999. Cash of $47.8 million was used by the Company during the six months ended June 30, 2000 to repurchase its common stock. During this same period, cash proceeds of $0.3 million were generated from the issuance of common stock. In the six months ended June 30, 1999, cash of $17.0 million was used by the Company to repurchase its common stock and cash proceeds of $4.7 million were generated from the issuance of common stock. Cash of $18.3 million was generated from the issuance of treasury stock associated with the Company's stock option and employee stock purchase plans in 27 28 the six months ended June 30, 2000 compared to $11.1 million generated in the comparable period of 1999. The Company engages in business operations around the world and is therefore exposed to foreign currency fluctuations. As of June 30, 2000, the Company had identifiable assets totaling $171.9 million associated with its European operations and $74.3 million associated with its Intercontinental operations. The Company experiences foreign exchange transaction exposure from certain balances denominated in different currencies. The Company hedges certain of these short-term exposures under a plan approved by the Board of Directors (see "Qualitative and Quantitative Disclosure of Market Risk," Part I, Item 3). The Company also experiences foreign exchange translation exposure on its net assets denominated in different currencies. As certain of these net assets are considered by Sybase, Inc., the U.S. parent company, to be a permanent investment in the respective subsidiaries, the related foreign currency translation gains and losses are reflected in an accumulated other comprehensive loss in stockholders' equity. Cash, cash equivalents and cash investments totaled $340.6 million at June 30, 2000, compared to $299.3 million at June 30, 1999. During the six months ended June 30, 2000, the Company repurchased 2.1 million shares of its common stock for $47.8 million pursuant to the Board of Directors' authorization. On February 2, 2000, the Board of Directors authorized the Company to repurchase up to an additional $50.0 million of its outstanding common stock in open market transactions from time to time, subject to price and market conditions. This action increased to $150.0 million the total amount previously authorized under this program. The Company believes that it has the financial resources needed for the foreseeable future to meet its presently anticipated business requirements, including capital expenditures and strategic programs. FUTURE OPERATING RESULTS Sybase's future operating results may vary substantially from period to period due to a variety of significant risks, some of which are discussed in this Report on Form 10-Q. We strongly urge current and prospective investors to carefully consider the cautionary statements and risks contained in this Report, in the Report on Form 10-Q for the quarter ended March 31, 2000, and in the Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as amended. Stock Price Volatility Sybase's ability to exceed, or its failure to achieve, expected operating results for any period could significantly impact the Company's stock price. Inevitably, some investors will experience gains while others will experience losses depending on the timing of their investment. The market for the Company's stock is highly volatile, and the trading price of the Company's Common Stock has fluctuated widely during the past 5 years. The stock price may continue to fluctuate in the future in response to various factors, including the Company's financial results, press and industry analyst reports, market acceptance of our products and pricing policies, activities of competitors, and other events. In addition, the stock market has from time to time 28 29 experienced extreme price and volume fluctuations that have categorically affected the market price for high-technology companies, but which often have been unrelated to the operating performance of these companies. Revenue-Related Factors The timing and amount of Sybase's revenues are subject to a number of factors that make it difficult to accurately estimate revenues and operating results on a quarterly or annual basis. Since the Company operates with little or no backlog, quarterly revenues depend largely on orders booked and shipped in that quarter. Historically, the Company has recorded 50% to 70% of its quarterly revenues in the last month of each quarter, particularly during the final two weeks of that month. The Company's customers include many large enterprises that make substantial investments in our products and services. Therefore, the inability to record one or more large orders from a customer at the very end of a quarter could materially and adversely impact our results or operations. The Company's operating expenses are based on projected annual and quarterly revenue levels, and are generally incurred ratably throughout each quarter. Since our operating expenses are relatively fixed in the short term, failure to realize projected revenues for a specified period could impact operating results, causing an operating loss for that period, as occurred in the first quarter of 1998. In North America, Sybase currently ships most of its products from its California distribution facilities. Because we tend to record a high percentage of revenues during the last two weeks of each quarter, disruption of operations at the facility at that time (due to natural calamity or systems failure, for example) could directly harm the Company's ability to record revenues for such quarter. This could, in turn, have an adverse impact on operating results. Competition The market for the Company's products and services is fast-paced and extremely competitive, and is marked by dynamic customer demands, short product life cycles, and the rapid emergence of the Internet marketplace. Sybase has numerous competitors, including large companies such as Oracle Corporation, Microsoft Corporation, and IBM Corporation, and smaller highly aggressive Internet firms. Many of these companies may have greater financial, technical, sales, and marketing resources, and a larger installed base than Sybase. In addition, our competitors' advertising and marketing efforts could adversely influence customer perception of our products and services, and harm our business and prospects as a result. To remain competitive, Sybase must be able to develop new products, enhance existing products and retain competitive pricing policies in a timely manner. The Company's failure to compete successfully with new or existing competitors could have a material adverse impact on the Company's business, and on the market price of the Company's Common Stock. Product Development Increasing widespread use of the Internet may significantly alter how the Company does business in the future. This, in turn, could affect our ability to timely meet the demand for new or enhanced products and services at competitive prices. 29 30 In 2000, the Company began shipping Sybase Enterprise Portal, the industry's first enterprise-class portal product designed to enable organizations to provide personalized business interfaces to employees, customers, partners and suppliers. In May 2000, the latest versions of Replication Server, EnterpriseConnect and MainframeConnect, the Company's data movement and data access products designed to operate with the Enterprise Portal technology, also became generally available. Sybase Enterprise Portal solutions are intended to enable successful e-Business strategies for organizations transacting business via the Internet. As a general matter, deployment of enterprise portals has increased dramatically during the past year, and the Company believes that increasing demand for enterprise portal solutions will enhance Sybase's revenues and profitability. However, if the market does not continue to develop as anticipated, or if the Company's Enterprise Portal solutions and services do not successfully compete in the marketplace, increased revenues and profitability may not be realized. During 1998 and 1999, Sybase created certain integrated product sets intended to offer customers more complete packaged solutions. As a result, certain individual products incorporated into the product sets were no longer available for sale separately. Such integration is intended to address customer needs in a more comprehensive way and improve Company revenues and profitability. However, the elimination of certain products for individual sale could adversely affect license fees and service revenues if this change is not well received in the marketplace. Sybase's future results may also be affected if its products cannot interoperate and perform well with software products of other companies. Certain leading applications currently are not interoperable with Sybase products, and others may never be. In addition, many of Sybase's principal products are designed for use with products offered by competitors. In the future, vendors of non-Sybase products may become less willing to provide the Company with access to their products, technical information, and marketing and sales support, which could harm the Company's business and prospects. Divisional Sales Model In January 1999, the Company realigned its direct sales force, product teams and professional services capabilities into four divisions. This reorganization was intended to enhance overall Company revenues and profitability by providing increased focus on each of four key markets: Enterprise Solutions, Mobile and Embedded Computing, Internet Applications and Business Intelligence. In January 2000, the acquisition of HFN (now Financial Fusion, Inc.), a wholly-owned subsidiary, increased the Company's focus on the financial services market. In May 2000, the Company announced the launch of iAnywhere Solutions, Inc., a wholly-owned subsidiary, dedicated to mobile and wireless e-Business, or "m-Business" products and services. If the Company has misjudged the demand for its products and services in these markets, or if the Company's divisions and subsidiaries are unable to coordinate their respective sales efforts in a focused and efficient way, the change could materially and adversely affect Sybase's business and prospects. International Operations Sybase derives a substantial portion of its revenues from its international operations. For the three months ended June 30, 2000, these revenues represented 38 percent of the Company's total revenues for that period. In 1999, these revenues represented 39 percent of the Company's total revenues for the fiscal year. As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. For a discussion of risks associated with currency fluctuation, see "Quantitative and Qualitative Disclosure of Market Risk - Foreign Exchange Risk", Part I, Item 3. The Company's revenues from international operations could also fluctuate due to the relative immaturity of some markets, rapid growth in other markets, and organizational changes made by Sybase to accommodate these conditions. During 1998 and 1999, for example, the Company closed subsidiaries in Mexico, Thailand, Chile, Peru and Venezuela. Several significant 30 31 management and organizational changes occurred in the same period, including the resignation or replacement of several country managers in Europe and Asia and the European General Manager. Other factors that could affect aspects of our international operations include: - - Changes in political, regulatory, or economic conditions - - Changes or limitations in trade protection laws - - Changes in tax treaties or laws favorable to Sybase - - Natural disasters Intellectual Property The Company's inability to obtain adequate copyright, patent or trade secret protection for our products in certain countries may have a material adverse impact on future operating results. Also, as the number of software products and associated patents increase, it is possible that software developers will become subject to more frequent infringement claims. In the past, third parties have claimed that their patents or other proprietary rights were violated by Sybase products. It is possible that such claims will be asserted in the future. Regardless of whether these claims have merit, they can be time consuming and expensive to defend or settle, and can harm the Company's business and reputation. We do not believe our products infringe any third party patents or proprietary rights, but there is no guarantee that we can avoid claims or findings of infringement in the future. Human Resources The Company's inability to hire and retain qualified technical, managerial, sales and other employees could affect our product development and sales efforts, other aspects of Company operations, and our financial results. Competition for such personnel is intense, particularly with the increase in pre-IPO Internet "dot-com" companies that attract many skilled and knowledgeable individuals. The Company's financial and stock price performance relative to the "dot-com" companies and other companies with whom Sybase competes for employees could also impact the degree of future employee turnover. During the past two years, the Company has experienced a number of changes in its Board of Directors and in its executive management team. For example, in April 2000, Linda K. Yates became a member of the Sybase Board. In November 1999, Cecilia Claudio also joined the Board. During 1999, Leo T. Hindery, Jeffrey T. Webber and Robert S. Epstein resigned from the Board. John Chen became the Company's Chairman of the Board, President and Chief Executive Officer in 1998. In early 1999, Pieter Van der Vorst became the Company's Chief Financial Officer, Pamela George was named Vice President, Corporate Marketing, and Daniel Carl became Vice President and General Counsel. Additionally, when the Company established its operating divisions in 1999, it appointed a general manager for each division. This resulted in changing or reassigning 31 32 the prior job responsibilities of a number of executives. Further changes involving executives and managers could increase the current rate of employee turnover, particularly in consulting, engineering and sales. Further changes in Board memebers could alter the Company's current strategic business plans. Acquisitions Sybase frequently explores possible acquisitions and strategic ventures with third parties as a way of expanding and enhancing its business. Sybase has acquired a number of companies during the past several years, and will likely acquire other companies, products, or technologies in the future. On January 20, 2000, the Company acquired Home Financial Network, an Internet financial services company specializing in the development of customized e-Finance Web sites. In 1999, Sybase acquired Data Warehouse Network, a provider of industry-specific business intelligence applications. For a further discussion of the Company's recent acquisitions, see Note 2 to Condensed Consolidated Financial Statements, Part I, Item 1, incorporated here by reference. The Company may not achieve the desired benefits of its acquisitions, particularly if it is unable to successfully assimilate an acquired company's management team, business infrastructure, company culture, or other important factors. Additionally, dedication of additional Company resources to handle these integration tasks could temporarily divert attention from other important Company business. Such acquisitions could also result in costs, liabilities, or additional expenses that could harm the Company's results of operations and financial condition. Recent Accounting Pronouncements For a discussion of risks associated with recent accounting pronouncements, see "New Accounting Pronouncements", in Note 5 to Condensed Consolidated Financial Statements, Part I, Item 1, incorporated here by reference. Year 2000 Update Since January 1, 2000, Sybase's worldwide operations have not experienced any significant problems or issues associated with the "Year 2000" issue. Additionally, our customer support organizations have not reported any significant Year 2000 problems experienced by customers as a result of using our products. The "Year 2000" issue arose from uncertainty regarding how many computer systems would be affected by the rollover at the end of 1999 of the two-digit year value from 99 to 00. Systems that could not properly recognize such information were in danger of generating incorrect data or suffering system failure. Well before the end of 1999, Sybase assessed all of its critical worldwide infrastructure systems (e.g., computer and telephone systems) and business systems (e.g., revenue, sales and marketing and finance systems) and also completed the remedial work necessary to make these systems Year 2000 compliant. The costs associated with these actions did not have a significant effect on the Company's results of operations or financial condition. The Company does not believe it will experience any significant Year 2000-related issues, but it will continue to monitor its operations throughout the remainder of the year. The Company believes it is adequately prepared to resolve any Year 2000 issues that may arise, and that the cost of doing so will not have a 32 33 material effect on the Company's results of operations or financial condition. There is no guarantee that Sybase will not encounter Year 2000-related issues in the future. Euro Currency On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing currencies and the Euro. The participating countries adopted the Euro as their common legal currency on that date. The transition period will last through January 1, 2001. There was no significant impact on the Company's worldwide operations caused by the adoption of the Euro. The introduction and the use of the Euro has not materially affected, and is not expected to affect in the future, the Company's foreign exchange activities, its use of derivatives and other financial instruments, or result in any material cost to the Company. The Company will continue to assess the impact of the introduction of the Euro currency over the transition period as well as the period subsequent to the transition. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK The following discussion about the Company's risk management activities includes "forward-looking statements" that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements for the reasons described under "Future Operating Results," Part I, Item 2. Foreign Exchange Risk As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company's financial position and results of operations. Historically, the Company's primary exposures have related to nondollar-denominated sales and expenses in Europe, Asia Pacific, including Japan and Australia, and Latin America. In order to reduce the effect of foreign currency fluctuations, the Company hedges its exposure on certain transactional balances that are denominated in foreign currencies through the use of foreign currency forward exchange contracts. For the most part, these exposures consist of intercompany accounts receivable owed to the Company as a result of local sales of software licenses by the Company's international subsidiaries. The majority of these exposures are denominated in European and Asia Pacific currencies, primarily the Euro and Hong Kong dollar. These forward exchange contracts are recorded at fair value and are short-term in nature (usually 30 days or less). There has been no material change in the Company's foreign exchange risk exposure since December 31, 1999. Interest Rate Risk The Company's exposure to market risk for changes in interest rates relates to the Company's investment portfolio, which consists of taxable, short-term money market instruments and debt securities with maturities between 90 days and two years. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. 33 34 The Company mitigates default risk by investing in only the safest and highest credit quality securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. These securities are generally classified as available for sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders' equity, net of tax, if material. Unrealized gains and losses at June 30, 2000 were not material. The Company has no cash flow exposure due to rate changes for cash equivalent and cash investments as all of these investments are at fixed interest rates. There has been no material change in the Company's interest rate risk exposure since December 31, 1999. 34 35 PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The information required by this item is incorporated by reference to Note 7 to Condensed Consolidated Financial Statements, Part I, Item 1. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Registrant was held on May 25, 2000. At the Annual Meeting, the following matters were submitted to a vote of stockholders and were approved, with the votes cast on each matter indicated: 1. Election of two Class II directors, each to serve a three-year term expiring upon the 2003 Annual Meeting of Stockholders or until a successor is duly elected and qualified. Richard C. Alberding and Linda K. Yates were the only nominees and each was elected (74,764,255 votes were cast for the election of Mr. Alberding and 2,421,354 were cast against; 74,749,994 votes were cast for election of Ms. Yates and 2,435,615 were cast against). There were no abstentions or non-votes. In addition to these directors, the Company's incumbent directors (John S. Chen, Alan B. Salisbury, L. William Krause, Robert P. Wayman, Cecilia Claudio) had terms that continued after the 2000 Annual Meeting. 2. Approval of an amendment to the Company's 1996 Stock Plan increasing the total number of shares of Common Stock reserved for issuance thereunder by 3,000,000 shares (34,663,201 for; 26,659,330 votes against; 109,719 abstentions; and 15,753,359 non-votes). 3. Approval of an amendment to the Company's Amended and Restated 1991 Employee Stock Purchase Plan and the Amended and Restated 1991 Foreign Subsidiary Employee Stock Purchase Plan increasing the total number of shares of Common Stock reserved for issuance thereunder by 2,000,000 shares (58,057,079 for; 3,281,366 against; 98,819 abstentions; and 15,748,345 non-votes). 4. Ratification of the appointment of Ernst & Young LLP as independent auditors for the year ending December 31, 2000 (76,427,053 for; 666,677 against; 91,779 abstentions and 100 non-votes). ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule 35 36 (b) Reports on Form 8-K: The following reports on Form 8-K were filed during the period covered by this Report on Form 10-Q: 1) Form 8-K/A filed April 3, 2000 2) Form 8-K filed April 27, 2000 3) Form 8-K/A filed June 19, 2000 4) Form 8-K/A filed June 29, 2000 36 37 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. August 10, 2000 SYBASE, INC. By /s/ PIETER VAN DER VORST --------------------------------- Pieter Van der Vorst Vice President and Chief Financial Officer (Principal Financial Officer) By /s/ MARTIN J. HEALY --------------------------------- Martin J. Healy Vice President and Corporate Controller (Principal Accounting Officer) 37 38 EXHIBIT INDEX TO SYBASE, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
Exhibit Number Description - -------------- ----------- 27 Financial Data Schedule
38 EX-27.1 2 ex27-1.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF SYBASE INC. AS OF JUNE 30, 2000 AND FOR THE YEARS THEN ENDED. 1,000 YEAR DEC-31-2000 JAN-01-2000 JUN-30-2000 214,578 59,181 215,925 (20,984) 0 504,603 352,094 (290,003) 866,636 397,317 0 0 0 91 573,614 866,636 221,541 460,820 21,524 122,114 63,159 0 307 35,895 15,794 20,101 0 0 0 20,101 0.23 0.22 REFLECTS BASIC EPS ACCORDING TO SFAS 128, EARNINGS PER SHARE
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