10-Q 1 f67133e10-q.txt 3RD QUARTER REPORT 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 September 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 October 31, 2000, 87,679,036 shares of the Registrant's Common Stock, $.001 par value, were outstanding. 2 SYBASE, INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2000 INDEX
Page ---- Forward-Looking Statements 3 Part I: Financial Information Item 1: Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2000 (Unaudited) 4 and December 31, 1999 Condensed Consolidated Statements of Operations for the three months and 5 nine months ended September 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Cash Flows for the nine months 6 ended September 30, 2000 and 1999 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2: Management's Discussion and Analysis of Financial Condition 20 and Results of Operations (Unaudited) Item 3: Quantitative and Qualitative Disclosures of Market Risk 35 Part II: Other Information Item 6: Exhibits and Reports on Form 8-K 37 Signatures 38 Exhibit Index 39
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 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, 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 such forward-looking statements. 3 4 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS SYBASE, INC. -------------------- CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 December 31, (Dollars in thousands, except share and per share data) (Unaudited) 1999 ------------- ------------ Current assets: Cash and cash equivalents $ 230,765 $ 250,103 Short-term cash investments 36,711 59,094 --------- --------- Total cash, cash equivalents and short-term cash investments 267,476 309,197 Accounts receivable, net 198,194 182,708 Deferred income taxes 16,015 15,826 Other current assets 19,478 14,924 --------- --------- Total current assets 501,163 522,655 Long-term cash investments 76,901 43,702 Property, equipment and improvements, net 57,313 67,587 Deferred income taxes 25,220 25,238 Capitalized software, net 32,977 35,934 Goodwill and other purchased intangibles, net 159,785 24,528 Other assets 16,167 17,691 --------- --------- Total assets $ 869,526 $ 737,335 ========= ========= Current liabilities: Accounts payable $ 20,689 $ 8,349 Accrued compensation and related expenses 47,404 57,625 Accrued income taxes 43,187 40,253 Other accrued liabilities 98,605 101,876 Deferred revenue 188,048 187,323 --------- --------- Total current liabilities 397,933 395,426 Other liabilities 5,843 5,799 Minority interest 1,937 -- 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; 90,520,935 shares issued and 88,552,770 outstanding (1999-82,952,192 shares issued and 80,920,691 outstanding) 91 83 Additional paid-in capital 576,190 432,352 Accumulated deficit (41,701) (48,037) Accumulated other comprehensive loss (28,807) (16,426) Cost of 1,968,165 shares of treasury stock (1999-2,031,501 shares) (41,960) (31,862) --------- --------- Total stockholders' equity 463,813 336,110 --------- --------- Total liabilities and stockholders' equity $ 869,526 $ 737,335 ========= =========
See accompanying notes. 4 5 SYBASE, INC. -------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ----------------------- (In thousands, except per share data) 2000 1999 2000 1999 -------- -------- -------- --------- Revenues: License fees $114,370 $104,216 $335,911 $ 298,189 Services 124,733 111,887 364,012 336,369 -------- -------- -------- --------- Total revenues 239,103 216,103 699,923 634,558 Costs and expenses: Cost of license fees 11,411 9,204 32,934 29,992 Cost of services 60,940 55,880 183,054 162,032 Sales and marketing 84,591 75,736 251,774 230,786 Product development and engineering 35,770 34,823 98,930 107,387 General and administrative 14,828 16,630 50,110 51,417 Amortization of goodwill and other 8,107 3,399 24,578 10,519 purchased intangibles In-process research and development -- -- 8,000 -- Cost (reversals) of restructuring -- -- -- (5,619) -------- -------- -------- --------- Total costs and expenses 215,647 195,672 649,380 586,514 -------- -------- -------- --------- Operating income 23,456 20,431 50,543 48,044 Interest income 4,765 3,477 13,095 9,878 Interest expense and other, net 1,242 1,251 1,720 1,473 Minority interest 24 -- 24 -- -------- -------- -------- --------- Income before income taxes 29,487 25,159 65,382 59,395 Provision for income taxes 12,974 9,103 28,768 23,164 -------- -------- -------- --------- Net income $ 16,513 $ 16,056 $ 36,614 $ 36,231 ======== ======== ======== ========= Basic net income per share $ 0.19 $ 0.20 $ 0.42 $ 0.44 ======== ======== ======== ========= Shares used in computing basic net income per share 88,279 81,611 87,636 81,861 ======== ======== ======== ========= Diluted net income per share $ 0.18 $ 0.19 $ 0.40 $ 0.43 ======== ======== ======== ========= Shares used in computing diluted net income per share 93,029 84,088 92,311 83,717 ======== ======== ======== =========
See accompanying notes. 5 6 SYBASE, INC. -------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30 ------------------------- (In thousands) 2000 1999 --------- --------- Cash and cash equivalents, beginning of year $ 250,103 $ 224,665 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 36,614 36,231 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 81,082 68,906 Write-off of in-process research and development 8,000 -- Write-off of assets in restructuring -- (545) (Gain) Loss on disposal of assets (50) 3,178 Deferred income taxes (171) (96) Changes in assets and liabilities: Accounts receivable (18,448) 33,963 Other current assets (4,554) (4,573) Accounts payable 9,185 (2,269) Accrued compensation and related expenses (11,616) (887) Accrued income taxes 2,927 11,223 Other accrued liabilities (3,494) (13,967) Deferred revenues 12 (20,052) Other liabilities 14 1,233 --------- --------- Net cash provided by operating activities 99,501 112,345 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale cash investments (95,854) (114,651) Maturities of available-for-sale cash investments 57,858 30,345 Sales of available-for-sale cash investments 26,346 7,530 Business combinations, net of cash acquired (30,098) (8,047) Purchases of property, equipment and improvements (15,754) (21,083) Proceeds from sale of fixed assets 100 11,036 Capitalized software development costs (14,085) (14,178) Minority Interest 1,937 -- Decrease in other assets (590) 156 --------- --------- Net cash used for investing activities (70,140) (108,892) CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in other current liabilities -- (1,432) Proceeds from issuance of common stock 2,876 4,704 Proceeds from the issuance of treasury stock 25,775 20,607 Purchases of treasury stock (66,151) (31,533) --------- --------- Net cash used for financing activities (37,500) (7,654) Effect of exchange rate changes on cash (11,199) (3,120) --------- --------- Net decrease in cash and cash equivalents (19,338) (7,321) Cash and cash equivalents, end of period 230,765 217,344 Cash investments, end of period 113,612 101,724 --------- --------- Total cash, cash equivalents, and cash investments, end of period $ 344,377 $ 319,068 ========= ========= Supplemental disclosures: Interest paid $ 354 $ 76 ========= ========= Income taxes paid $ 22,175 $ 11,441 ========= =========
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 to Stockholders for the year ended December 31, 1999. The results of operations for the three and nine months ended September 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. In September 2000, the Company acquired certain assets of its distributor in Mexico for approximately $4.0 million, and assumed certain of its liabilities. In addition, pursuant to the relevant agreements, the Company is obligated to make certain contingent payments in subsequent years based on certain agreed-upon performance criteria. The aggregate maximum additional contingent amount payable in 2001 and 2002 is $5.2 million. This transaction has been accounted for as a purchase. The results of operations of the Mexico entity 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. 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 websites. This transaction is 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 Cash 25.9 HFN stock options assumed 11.2 Merger costs, legal and accounting 0.5 ------ Total purchase consideration $167.4 ======
The estimated fair value of the common stock to be issued was based on the average closing price of 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: 7 8 SYBASE INC. _____________________________ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - 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 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, and 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 of 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.
Nine Nine Months Months Ended Ended (In thousands except for per share data) 9/30/00 9/30/99 --------- -------- Revenue $ 699,923 $636,583 Net income 32,354 14,041 Basic net income per share 0.37 0.16 Diluted net income per share 0.35 0.15
In March 1999, the Company paid $5.4 million for Convertible Secured Promissory Notes due December 31, 2002 (Notes) 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. On July 13, 2000, Sybase converted the Notes, then sold 10.0 percent of the resulting share capital to a third party for $1.7 million. In February 1999, the Company acquired Data Warehouse Network (DWN), an Ireland-based, privately held provider of packaged, industry-specific business intelligence applications. Under the acquisition agreement, the Company paid $2.7 million in cash for certain assets and 8 9 SYBASE INC. _____________________________ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. In July 2000, the Company invested $2.0 million for a majority interest in a company established with a subsidiary of Hong Kong Telecom. The company is engaged in the business of operating as an application services provider to deliver a total financial portal solution for different finance verticals. The accounts of the company are included in the Condensed Consolidated Financial Statements. In July 2000, the Company invested $10.0 million for a minority interest in Cygnifi Derivatives Services, LLC, a limited liability company established with JP Morgan Ventures Corporation and several others. The purpose of this entity is to develop, market and supply business-to-business e-commerce risk management services and solutions to finance institutions, asset managers, fund managers, pension funds, foundations, endowed institutions, corporations and other users of such services. The Company accounts for its investment in this entity under the cost method of accounting. 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 and warrants using the treasury stock method. The following table shows the computation of basic and diluted net income per share:
Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended (In thousands, except per share data) 9/30/00 9/30/99 9/30/00 9/30/99 ------- ------- ------- ------- Net income $16,513 $16,056 $36,614 $36,231 Shares used in computing basic net income per share 88,279 81,611 87,636 81,861 Effect of dilutive securities - stock options 4,750 2,477 4,675 1,856 ------- ------- ------- ------- Shares used in computing diluted net income per share 93,029 84,088 92,311 83,717 Basic net income per share $ 0.19 $ 0.20 $ 0.42 $ 0.44 ======= ======= ======= ======= Diluted net income per share $ 0.18 $ 0.19 $ 0.40 $ 0.43 ======= ======= ======= =======
9 10 SYBASE INC. _____________________________ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Comprehensive Income. The following table sets forth the calculation of comprehensive income for all periods presented:
Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended (In thousands) 9/30/00 9/30/99 9/30/00 9/30/99 -------- -------- -------- -------- Net income $16,513 $ 16,056 $36,614 $36,231 Foreign currency translation gains/(losses) (7,879) 956 (12,381) (4,380) ------- -------- ------- ------- Comprehensive income $ 8,634 $ 17,012 $24,233 $31,851 ======= ======== ======= =======
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 disclosure requirements described in SAB 101, and any changes resulting from SAB 101 must be reported as a change in accounting principles in the quarter ending December 31, 2000. The adoption of SAB 101 is not expected to have a material effect on the Company's financial statements. 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. In June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment to FASB Statement No. 133" which amended Statement 133 with respect to four specific issues. The Company is required to adopt Statement 133, as amended, for the year ending December 31, 2001. The Company does not expect that the adoption of Statement 133 will have a material effect 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. 10 11 SYBASE INC. _____________________________ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 support e-portals and integrate external data, events and applications into the portals. The Mobile and Embedded Computing Division (MEC) provides solutions that deliver enterprise information and applications to any location where business transactions occur, including remote, mobile and hand-held platforms. 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 translate data from multiple 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). 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." 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 11 12 SYBASE INC. _____________________________ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 September 30, 2000, is presented below:
Consolidated (In thousands) ESD IAD MEC BID FFI Elimination Total -------- ------- ------- ------- -------- ----------- ------------ Revenues: License fees $ 82,962 $13,296 $15,365 $ 281 $ 2,466 -- $114,370 Services 118,980 154 372 395 4,832 124,733 -------- ------- ------- ------- -------- -------- -------- Direct revenues from external customers 201,942 13,450 15,737 676 7,298 239,103 Intersegment revenues 676 7,354 9,579 5,475 1,209 (24,293) -- -------- ------- ------- ------- -------- -------- -------- Total revenues 202,618 20,804 25,316 6,151 8,507 (24,293) 239,103 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 172,863 16,155 17,968 8,225 13,155 (24,293) 204,073 -------- ------- ------- ------- -------- -------- -------- Operating income (loss) before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 29,755 4,649 7,348 (2,074) (4,648) -- 35,030 Amortization of goodwill and other purchased intangibles 1,520 983 21 1,173 4,410 -- 8,107 Amortization of purchased technology 393 -- -- -- 750 -- 1,143 -------- ------- ------- ------- -------- -------- ------- Operating income (loss) before unallocated costs 27,842 3,666 7,327 (3,247) (9,808) -- 25,780 Unallocated expense 2,324 ------- Operating income 23,456 Interest income, interest expense and other, net 6,007 Minority interest 24 ------- Income before income taxes $29,487 =======
12 13 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 September 30, 1999, is presented below:
Consolidated (In thousands) ESD IAD MEC BID Elimination Total -------- ------- ------- ------- ----------- ------------- Revenues: License fees $ 75,463 $16,811 $ 8,194 $ 3,748 -- $104,216 Services 111,744 -- 67 76 -- 111,887 -------- ------- ------- ------- ------- -------- Direct revenues from external customers 187,207 16,811 8,261 3,824 -- 216,103 Intersegment revenues 213 7,286 11,201 3,362 (22,062) -- -------- ------- ------- ------- ------- -------- Total revenues 187,420 24,097 19,462 7,186 (22,062) 216,103 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 167,853 19,377 13,699 7,924 (22,062) 186,791 -------- ------- ------- ------- ------- -------- Operating income (loss) before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 19,567 4,720 5,763 (738) -- 29,312 Amortization of goodwill and other purchased intangibles 2,148 991 12 240 -- 3,391 Amortization of purchased technology 393 -- -- -- -- 393 -------- ------- ------- ------- ------- -------- Operating income (loss) before unallocated costs 17,026 3,729 5,751 (978) -- 25,528 Unallocated expense 5,097 -------- Operating income 20,431 Interest income, interest expense and other, net 4,728 ------- Income before income taxes $25,159 =======
13 14 SYBASE INC. _____________________________ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A summary of the segment financial information reported to the CODM for the nine months ended September 30, 2000, is presented below:
Consolidated (In thousands) ESD IAD MEC BID FFI Elimination Total -------- ------- ------- -------- -------- ----------- ------------ Revenues: License fees $247,112 $43,085 $38,351 $ 476 $ 6,887 -- $335,911 Services 352,120 380 858 1,028 9,626 364,012 -------- ------- ------- -------- -------- -------- -------- Direct revenues from external customers 599,232 43,465 39,209 1,504 16,513 699,923 Intersegment revenues 1,479 24,366 27,578 12,483 2,954 (68,860) -- -------- ------- ------- -------- -------- -------- -------- Total revenues 600,711 67,831 66,787 13,987 19,467 (68,860) 699,923 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 518,849 51,683 49,100 24,578 34,334 (68,860) 609,684 -------- ------- ------- -------- -------- -------- -------- Operating income (loss) before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 81,862 16,148 17,687 (10,591) (14,867) -- 90,239 Amortization of goodwill and other purchased intangibles 5,404 2,957 64 2,811 13,342 -- 24,578 Write off of in-process research and development -- -- -- -- 8,000 -- 8,000 Amortization of purchased technology 1,179 -- -- -- 2,083 -- 3,262 -------- ------- ------- -------- -------- -------- -------- Operating income (loss) before unallocated costs 75,279 13,191 17,623 (13,402) (38,292) -- 54,399 Unallocated expense 3,856 -------- Operating income 50,543 Interest income, interest expense and other, 14,815 net Minority interest 24 -------- Income before income taxes $ 65,382 ========
14 15 SYBASE INC. _____________________________ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A summary of the segment financial information reported to the CODM for the nine months ended September 30, 1999, is presented below:
Consolidated (In thousands) ESD IAD MEC BID Elimination Total -------- ------- ------- -------- ----------- ------------ Revenues: License fees $214,602 $49,274 $26,603 $ 7,710 -- $298,189 Services 335,841 -- 67 461 -- 336,369 -------- ------- ------- -------- ------- -------- Direct revenues from external customers 550,443 49,274 26,670 8,171 -- 634,558 Intersegment revenues 990 22,976 26,730 8,712 (59,408) -- -------- ------- ------- -------- ------- -------- Total revenues 551,433 72,250 53,400 16,883 (59,408) 634,558 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 490,102 58,796 39,563 23,444 (59,408) 552,497 -------- ------- ------- -------- ------- -------- Operating income (loss) before amortization of goodwill and other purchased intangibles, write off of in-process research and development and amortization of purchased technology 61,331 13,454 13,837 (6,561) -- 82,061 Amortization of goodwill and other purchased intangibles 7,040 2,755 36 680 -- 10,511 Amortization of purchased technology 1,179 -- -- -- -- 1,179 -------- ------- ------- -------- ------- -------- Operating income (loss) before unallocated costs 53,112 10,699 13,801 (7,241) -- 70,371 Unallocated expense 22,327 -------- Operating income 48,044 Interest income, interest expense and other, net 11,351 -------- Income before income taxes $ 59,395 ========
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 K.K., 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 complaint was filed in the Northern California District Court. A second similar derivative 15 16 SYBASE INC. _____________________________ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 were approved by the court on September 29, 2000. 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. These escrowed amounts have been paid. The Company is also a party to various legal disputes and proceedings arising in 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 September 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 previously authorized under the repurchase program to $150.0 million. (See Note 11 - Subsequent Events). 16 17 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 that allows for purchase of 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 (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 ========
During the third quarter of 1999, the Company sold its facility in Concord, Massachusetts and simultaneously entered into a sales-leaseback agreement. Under the terms of this agreement, the Company entered into a seven-year operating lease. The sales price of $5.3 million resulted in a book gain of $2.8 million, which will be amortized over the seven-year lease period. Future minimum lease payments under this noncancellable operating lease as of September 30, 2000 are as follows (in thousands): 2000 $ 134 2001 535 2002 545 2003 564 2004 564 Thereafter 940 ------ Total minimum lease payments $3,282 ======
17 18 SYBASE INC. _____________________________ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 then-existing 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 following table summarizes the activity related to the restructuring reserve at September 30, 2000:
Accrued Accrued Liabilities Liabilities at Amounts at (In thousands) 12/31/99 Paid 9/30/00 ----------- ------- ----------- Termination payments to employees and other related costs $ 442 $235 $ 207 Lease cancellations and commitments 1,296 644 652 Other 372 -- 372 ------ ---- ------ Total $2,110 $879 $1,231 ====== ==== ======
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 quarter 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: (i) termination payments due to employees who were terminated as part of the 1998 Plan, which were either not claimed, or were not utilized because the 18 19 SYBASE INC. _____________________________ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) terminated employee did not qualify to receive the benefits; and (ii) termination payments due to employees whose positions were eliminated as part of the 1998 Plan, but who were asked to stay with the Company to fill other 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 (i) sublet certain closed facilities earlier than anticipated, or (ii) negotiate settlements with the landlords for the termination of the leases on certain closed facilities for an amount less than the amounts provided in the 1998 Plan. During the nine months ended September 30, 2000, no new information has arisen which warranted a reversal of the accrual. 11. Subsequent Events. On November 1, 2000, the Board of Directors authorized the repurchase of up to an additional $100.0 million of the Company's outstanding common stock in open market transactions from time to time, subject to price and market conditions. This action increases the aggregate total previously authorized under the repurchase program to $250.0 million. 19 20 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
REVENUES (DOLLARS IN MILLIONS) Three Three Nine Nine Months Months Months Months Ended Ended Percent Ended Ended Percent 9/30/00 9/30/99 Change 9/30/00 9/30/99 Change ------- ------- ------- ------- ------- ------- License fees $114.4 $104.2 10% $335.9 $298.2 13% Percentage of total revenues 48% 48% 48% 47% Services $124.7 $111.9 11% $364.0 $336.4 8% Percentage of total revenues 52% 52% 52% 53% Total revenues $239.1 $216.1 11% $699.9 $634.6 10%
Total revenues for the three months ended September 30, 2000, increased 11 percent to $239.1 million as compared to $216.1 million for the three months ended September 30, 1999. For the nine months ended September 30, 2000, total revenues increased 10 percent to $699.9 million as compared to $634.6 million for the nine months ended September 30, 1999. License fees revenues increased 10 percent to $114.4 million for the three months ended September 30, 2000, as compared to $104.2 million for the three months ended September 30, 1999. For the nine months ended September 30, 2000, license fees revenues increased 13 percent to $335.9 million as compared to $298.2 million for the nine months ended September 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 subsequent to the Company's acquisition of HFN (See Note 2 to the Condensed Consolidated Financial Statements). The increases in license fees revenues generated by the ESD and MEC divisions were partially offset by a decrease in the license revenues of BID (primarily data warehouse products) and IAD (primarily PowerBuilder(R) products). 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 11 percent to $124.7 million for the three months ended September 30, 2000, as compared to $111.9 million for the three months ended September 30, 1999. For the nine months ended September 30, 2000, services revenues increased 8 percent to $364.0 million as compared to $336.4 million in the nine months ended September 30, 1999. 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. 20 21 Services revenues as a percentage of total revenues remained consistent at 52 percent for the three months ended September 30, 2000, and September 30, 1999, respectively. For the nine months ended September 30, 2000, services revenues as a percentage of total revenues was 52 percent as compared to 53 percent for the nine months ended September 30, 1999.
GEOGRAPHICAL REVENUES (DOLLARS IN MILLIONS) Three Three Nine Nine Months Months Months Months Ended Ended Percent Ended Ended Percent 9/30/00 9/30/99 Change 9/30/00 9/30/99 Change ------- ------- ------- ------- ------- ------- North American $148.3 $136.7 9% $429.3 $389.5 10% Percentage of total revenues 62% 63% 61% 61% International European $ 57.1 $ 52.0 10% $178.8 $165.9 8% Percentage of total revenues 24% 24% 26% 26% Intercontinental $ 33.7 $ 27.4 23% $ 91.8 $ 79.2 16% Percentage of total revenues 14% 13% 13% 13% Total International $ 90.8 $ 79.4 14% $270.6 $245.1 10% Percentage of total revenues 38% 37% 39% 39% Total revenues $239.1 $216.1 11% $699.9 $634.6 10%
North American revenues (United States and Canada) increased 9 percent to $148.3 million for the three months ended September 30, 2000, as compared to $136.7 million for the three months ended September 30, 1999. North American revenues increased 10 percent to $429.3 million in the nine months ended September 30, 2000, as compared to $389.5 million for the nine months ended September 30, 1999. International revenues increased 14 percent and 10 percent for the three and nine months ended September 30, 2000, respectively, to $90.8 million and $270.6 million, from $79.4 million and $245.1 million, respectively, for both comparable periods of 1999. European revenues increased 10 percent and 8 percent for the three and nine months ended September 30, 2000, respectively, to $57.1 million and $178.8 million, from $52.0 million and $165.9 million, respectively, for both comparable periods of 1999. Intercontinental revenues (Japan, Asia Pacific and South America) increased 23 percent and 16 percent for the three and nine months ended September 30, 2000, respectively, to $33.7 million and $91.8 million, from $27.4 million and $79.2 million, respectively, for both comparable periods of 1999. The increase in North America revenues for the three and nine months ended September 30, 2000, was primarily attributable to an increase in revenues of the ESD, FFI, and MEC divisions. The increase in European revenues for the three month period ended September 30, 2000, was primarily related to an increase in revenues of the ESD division, partially offset by decreased revenues in the IAD division. The increase in European revenues for the nine month period ended September 30, 2000, primarily related to an increase in revenues of the ESD division. The increase in Intercontinental revenues for the three and nine months ended September 30, 2000, was primarily related to an increase in revenues of the ESD and MEC divisions. 21 22 International revenues comprised 38 percent and 39 percent of total revenues for the three and nine months ended September 30, 2000, respectively, compared to 37 percent and 39 percent for the three and nine months ended September 30, 1999, respectively. 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 nine months ended September 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," Item 3. COSTS AND EXPENSES (DOLLARS IN MILLIONS)
Three Three Nine Nine Months Ended Months Ended Percent Months Ended Months Ended Percent 9/30/00 9/30/99 Change 9/30/00 9/30/99 Change ------------ ------------ ------- ------------ ------------ ------- Cost of license fees $ 11.4 $ 9.2 24% $ 32.9 $ 30.0 10% Percentage of license fees revenues 10% 9% 10% 10% Cost of services $ 60.9 $ 55.9 9% $183.1 $162.0 13% Percentage of services revenues 49% 50% 50% 48% Sales and marketing $ 84.6 $ 75.7 12% $251.8 $230.8 9% Percentage of total revenues 35% 35% 36% 36% Product development and engineering $ 35.8 $ 34.8 3% $ 98.9 $107.4 (8%) Percentage of total revenues 15% 16% 14% 17% General and administrative $ 14.8 $ 16.6 (11%) $ 50.1 $ 51.4 (3%) Percentage of total revenues 6% 8% 7% 8% Amortization of goodwill and other purchased intangibles $ 8.1 $ 3.4 139% $ 24.6 $ 10.5 134% Percentage of total revenues 3% 2% 4% 2% In-process research and development -- -- -- $ 8.0 -- * Percentage of total revenues -- -- 1% -- Cost (reversal) of restructuring -- -- -- -- $ (5.6) * Percentage of total revenues -- -- -- (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 $11.4 million and $32.9 million for the three and 22 23 nine months ended September 30, 2000, respectively, as compared to $9.2 million and $30.0 million for the same periods in 1999. Such costs were 10 percent of license fees revenues for the three and nine months ended September 30, 2000, as compared to 9 percent and 10 percent, respectively, for the same periods in 1999. The increase in the cost of license fees in the three and nine months ended September 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. The increase for the nine months ended September 30, 2000, was partially offset by a decrease in royalties payable to third parties. Amortization of capitalized software costs included in cost of license fees was $6.0 million and $17.4 million for the three and nine months ended September 30, 2000, respectively, as compared to $5.1 million and $14.7 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 7.0, Jaguar CTS(TM) 3.0 and 3.5, and Sybase(R) Enterprise Portal 1.0. 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 $60.9 million and $183.1 million for the three and nine months ended September 30, 2000, respectively, as compared to $55.9 million and $162.0 million for the same periods in 1999. These costs were 49 percent and 50 percent of services revenues for the three months and nine months ended September 30, 2000, as compared to 50 percent and 48 percent for the same periods in 1999. The increase in cost of services in absolute dollars 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 were $84.6 million and $251.8 million for the three and nine months ended September 30, 2000, respectively, as compared to $75.7 million and $230.8 million for the same periods in 1999. These costs were 35 percent of total revenues for the three months ended September 30, 2000 and 1999, and remained consistent at 36 percent of total revenues for the nine months ended September 30, 2000 and 1999. The increase in sales and marketing expenses in absolute dollars for both comparable periods is primarily due to sales expenses associated with increased revenues, including the addition of FFI, 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) were $35.8 million and $98.9 million for the three and nine months ended September 30, 2000, respectively, as compared to $34.8 million and $107.4 million for the same periods in 1999. These costs as a percentage of total revenues were 15 percent and 14 percent for the three and nine months ended September 30, 2000, respectively, and 16 percent and 17 percent, respectively, for the same periods in 1999. The increase in product development and engineering expenses in absolute dollars for the three months ended September 30, 2000, compared to the three months ended September 30, 1999, was due to the amortization of third party technology costs, which was partially offset by the decrease in allocated common costs. The decrease in product development and engineering costs in absolute 23 24 dollars for the nine months ended September 30, 2000, compared to the nine months ended September 30, 1999 was primarily due to a decrease in allocated common costs. The Company capitalized approximately $5.5 million and $14.1 million of software development costs for the three and nine months ended September 30, 2000, respectively, as compared to $5.6 million and $14.2 million for the same periods in 1999. For the nine months ended September 30, 2000, capitalized software costs included costs incurred for the development of the Sybase Enterprise Portal, Adaptive Server 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. 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 $14.8 million and $50.1 million for the three and nine months ended September 30, 2000, respectively, as compared to $16.6 million and $51.4 million for the same periods in 1999. General and administrative expenses represented 6 percent and 7 percent of total revenues for the three and nine months ended September 30, 2000, respectively, and 8 percent for the same periods in 1999. The decrease in general and administrative expenses in absolute dollars for the three and nine months ended September 30, 2000, was primarily due to a decrease in allocated common costs which were partially offset by the costs associated with FFI. Amortization of Goodwill and Other Purchased Intangibles. Amortization of goodwill and other purchased intangibles were $8.1 million and $24.6 million for the three and nine months ended September 30, 2000, respectively, as compared to $3.4 million and $10.5 million for the same periods in 1999. These costs were 3 percent and 4 percent of total revenues for the three and nine months ended September 30, 2000, respectively, and 2 percent for the same periods in 1999. The increase in absolute dollars is primarily due to amortization of goodwill and the established customer list associated with the HFN acquisition (See Note 2 to Condensed Consolidated Financial Statements). 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 had been 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 that time, 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 the date of acquisition. 24 25 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. 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 the 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- 25 26 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 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. It also contemplated 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 then-existing 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: (i) termination payments due to employees who were terminated as part of the 1998 Plan, which were either not claimed, or were not utilized because a terminated employee did not stay a specified period to qualify for the benefits, and (ii) termination payments due to employees whose positions were eliminated as part of the 1998 Plan but who were asked to stay with the Company to fill other 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 landlords for the termination of the leases on certain closed facilities for amounts less than the amount provided in the 1998 Plan. During the nine months ended September 30, 2000, no new information has arisen which warranted a reversal of the accrual. 26 27 OPERATING INCOME (DOLLARS IN MILLIONS)
Three Three Nine Nine Months Months Months Months Ended Ended Percent Ended Ended Percent 9/30/00 9/30/99 Change 9/30/00 9/30/99 Change ------- ------- ------- ------- --------- -------- Operating income $23.5 $20.4 15% $50.5 $48.0 5% Percentage of total revenues 10% 9% 7% 8% Operating income exclusive of cost (reversals) of restructuring $23.5 $20.4 15% $50.5 $42.4 19% Percentage of total revenues 10% 9% 7% 7%
Operating income, was $23.5 million and $50.5 million for the three and nine months ended September 30, 2000, respectively, compared to operating income (exclusive of reversals of restructuring charges) of $20.4 million and $42.4 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 research and development and the amortization of purchased technology relating to the acquisition of HFN. OTHER INCOME (EXPENSE), NET (DOLLARS IN MILLIONS)
Three Three Nine Nine Months Months Months Months Ended Ended Percent Ended Ended Percent 9/30/00 9/30/99 Change 9/30/00 9/30/99 Change ----------- ------------ ------- ------------ ------------ -------------- Interest income $ 4.8 $ 3.5 37% $13.1 $ 9.9 33% Percentage of total revenues 2% 2% 2% 2% Interest expense and other, net $ 1.2 $ 1.3 (1%) $ 1.7 $ 1.5 17% Percentage of total revenues 1% 1% * * Minority interest $ 0.0 * * $ 0.0 * * Percentage of total revenues * * * *
--------------- * Not meaningful Interest income was $4.8 million and $13.1 million for the three and nine months ended September 30, 2000, respectively, compared to $3.5 million and $9.9 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 $1.2 million and $1.7 million for the three and nine months ended September 30, 2000, respectively, compared to $1.3 million and $1.5 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 27 28 currency transactions and related hedging activities, including the cost of hedging foreign currency exposures, and gains from the disposition of certain real estate and investments. PROVISION FOR INCOME TAXES (DOLLARS IN MILLIONS)
Three Three Nine Nine Months Months Months Months Ended Ended Percent Ended Ended Percent 9/30/00 9/30/99 Change 9/30/00 9/30/99 Change ------- ------- ------- ------- ------- ------- Provision for income taxes $13.0 $9.1 43% $28.8 $23.2 24%
The Company recorded income tax provisions of $13.0 million and $28.8 million for the three and nine months ended September 30, 2000, respectively, as compared to $9.1 million and $23.2 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 $41.2 million at September 30, 2000. The deferred tax assets were net of a valuation allowance of $20.6 million. Realization of the Company's net 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. 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 EXCEPT PER SHARE DATA)
Three Three Nine Nine Months Months Months Months Ended Ended Percent Ended Ended Percent 9/30/00 9/30/99 Change 9/30/00 9/30/99 Change ------- ------- ------- ------- ------- ------- Net income $ 16.5 $ 16.1 3% $ 36.6 $ 36.2 1% Percentage of total revenues 7% 7% 5% 6% Basic net income per share $ 0.19 $ 0.20 (5%) $ 0.42 $ 0.44 (5%) Diluted net income per share $ 0.18 $ 0.19 (5%) $ 0.40 $ 0.43 (7%) Shares used in computing basic net income per share 88.3 81.6 8% 87.6 81.9 7% Shares used in computing diluted net income per share 93.0 84.1 11% 92.3 83.7 10%
The Company reported net income of $16.5 million and $36.6 million for the three and nine months ended September 30, 2000, respectively, as compared to net income of $16.1 million and $36.2 million for the same periods in 1999. The increase in net income for both comparable periods is related to the increase in total revenues and interest income which was partially offset by an increase in 2000 operating expenses and provision for income taxes. The increase in operating expenses is primarily related to the amortization of various intangibles, and the write- 28 29 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 $0.19 and $0.42 for the three and nine months ended September 30, 2000, respectively, as compared to $0.20 and $0.44 for the same periods in 1999. Diluted net income per share was $0.18 and $0.40 for the three and nine months ended September 30, 2000, respectively, as compared to $0.19 and $0.43 for the same periods in 1999. Shares used in computing basic net income per share increased 8 percent and 7 percent for the three and nine months ended September 30, 2000, respectively, as compared to the same periods in 1999 primarily due to the shares issued in 2000 in connection with the acquisition of HFN (See Note 2 to Condensed Consolidated Financial Statements). Shares used in computing diluted net income per share increased 11 percent and 10 percent for the three and nine months ended September 30, 2000, as compared to the same periods in 1999, primarily for the reasons stated above. LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN MILLIONS)
Nine Nine Months Months Ended Ended Percent 9/30/00 9/30/99 Change ------- ------- ------- Working capital $103.2 $112.3 (8%) Cash, cash equivalents and cash investments $344.4 $319.1 8% Net cash provided by operating activities $ 99.5 $112.3 (11%) Net cash used for investing activities $ 70.1 $108.9 (36%) Net cash used for financing activities $ 37.5 $ 7.7 *
--------------- * Not meaningful Net cash provided by operating activities was $99.5 million for the nine months ended September 30, 2000, compared to $112.3 million for the nine months ended September 30, 1999. Net cash provided by operating activities reflects an increase in accounts receivable of $18.4 million for the nine months ended September 30, 2000, as compared to a decrease of $34.0 million for the nine months ended September 30, 1999. Net cash provided by operating activities also reflects no material change in deferred revenue for the nine months ended September 30, 2000, compared to a decrease of $20.1 million for the same period in 1999. Depreciation and amortization charges, which are included in net income, but do not require the use of cash, amounted to $81.1 million for the nine months ended September 30, 2000 compared to $68.9 million for the same period in 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 of 2000. (See Note 2 to Condensed Consolidated Financial Statements). Net cash used for investing activities was $70.1 million for the nine months ended September 30, 2000, compared to $108.9 million for the same period in 1999. Investing activities included: capital expenditures of $15.8 million for the nine months ended September 30, 2000, compared 29 30 to $21.1 million for the same period in 1999; $30.1 million for business combinations, net of cash acquired, for the nine months ended September 30, 2000, compared to $8.0 million for the same period in 1999; and cash used for net purchases of cash investments of $11.7 million for the nine months ended September 30, 2000, compared to $76.8 million for the same period in 1999. Net cash used for financing activities was $37.5 million for the nine months ended September 30, 2000, compared to $7.7 million for the same period in 1999. For the nine months ended September 30, 2000, cash of $66.2 million was used by the Company to repurchase its common stock, cash of $25.8 million was generated from the issuance of treasury stock associated with the Company's stock option and employee stock purchase plans, and cash of $2.9 million was generated from the issuance of common stock. For the comparable period of 1999, cash of $31.5 million was used by the Company to repurchase its common stock, cash of $20.6 million was generated from the issuance of treasury stock, and cash of $4.7 million was generated from the issuance of common stock. The Company engages in global business operations and is therefore exposed to foreign currency fluctuations. As of September 30, 2000, the Company had identifiable net assets totaling $178.0 million associated with its European operations and $88.5 million associated with its intercontinental operations. The Company experiences foreign exchange translation exposure on its net assets denominated in different currencies. As certain of these 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 "Accumulated other comprehensive loss" under "Stockholders' equity" on the balance sheet. The Company also experiences foreign exchange transaction exposure from certain balances denominated in the non-functional currency of the originating entity. 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," Item 3. Cash, cash equivalents and cash investments totaled $344.4 million at September 30, 2000, compared to $319.1 million at September 30, 1999. During the nine months ended September 30, 2000, the Company repurchased 2.9 million shares of its common stock through open market transactions pursuant to a stock repurchase program authorized by the Board in 1999. On February 2 and November 1, 2000, the Board authorized increases in the funds available under the program, bringing the aggregate total amount authorized to $250.0 million. 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 30 31 contained in this Report, in the Reports on Form 10-Q for the quarters ended March 30, 2000, and June 30, 2000, respectively, 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 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. Sybase currently ships most of its products from three distribution facilities located in California, the Netherlands, and Singapore. Because we tend to record a high percentage of revenues during the last two weeks of each quarter, disruption of operations at any of these facilities 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 a number of smaller highly aggressive Internet and "dot.com" firms. Many of these companies may have greater 31 32 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. 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(R), 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 in recent years, 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. 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 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 generally are unable to coordinate their respective sales efforts in a 32 33 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 September 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", 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. For example, in September 2000, the Company acquired certain assets and assumed certain liabilities of its distributor in Mexico. During 1998 and 1999, the Company closed then-existing subsidiaries in Mexico, Thailand, Chile, Peru and Venezuela. Several significant 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 33 34 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 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 members 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 September 2000, the Company acquired certain of the assets of its distributor in Mexico. 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 the Condensed Consolidated Financial Statements, 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 the 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 34 35 organizations have not reported any significant Year 2000 problems experienced by customers as a result of using our products. The Company does not believe it will experience any significant Year 2000-related issues, but it will continue to monitor its operations in the near future. 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 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," Item 2. See also "Forward-Looking Statements," page 3, for a general discussion regarding such statements. 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 resulting from 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. 35 36 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. 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 September 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. 36 37 PART II: OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three months ended September 30, 2000. 37 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. November 14, 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) 38 39 EXHIBIT INDEX TO SYBASE, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
Exhibit Number Description -------------- ----------- 27 Financial Data Schedule
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