-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EEgNIPSNXIwP2SRHRviy5Mp1/VX4Wrp2Upu/UOabfID+rXNqe0o2F7mP0YCiimoz TTECqtI0mAbBGfEXoYS9hg== 0000950149-99-001483.txt : 19990816 0000950149-99-001483.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950149-99-001483 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYBASE INC CENTRAL INDEX KEY: 0000768262 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942951005 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19395 FILM NUMBER: 99688849 BUSINESS ADDRESS: STREET 1: 6475 CHRISTIE AVE CITY: EMERYVILLE STATE: CA ZIP: 94608 BUSINESS PHONE: 5109223500 MAIL ADDRESS: STREET 1: 6475 CHRISTIE AVE STREET 2: 6475 CHRISTIE AVE CITY: EMERYVILLE STATE: CA ZIP: 94608 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDED 6/30/1999 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1999 [ ] 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 Identification No.) Incorporation or Organization) 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 June 30, 1999, 81,738,086 shares of the Registrant's Common Stock, $.001 par value, were outstanding. 2 SYBASE, INC. FORM 10-Q QUARTER ENDED JUNE 30, 1999 INDEX
Page ---- Part I: Financial Information Item 1: Financial Statements (Unaudited) Condensed Consolidated Balance Sheets at June 30, 1999 and 3 December 31, 1998 Condensed Consolidated Statements of Operations for the three months and 4 six months ended June 30, 1999 and June 30, 1998 Condensed Consolidated Statements of Cash Flows for the six months 5 ended June 30, 1999 and June 30, 1998 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition 12 and Results of Operations Item 3: Quantitative and Qualitative Disclosure of Market Risk 26 Part II: Other Information Item 1: Legal Proceedings 27 Item 4: Submission of Matters to a Vote of Security Holders 27 Item 6: Exhibits and Reports on Form 8-K 28 Signatures 29 Exhibit Index 30
2 3 ITEM 1: FINANCIAL STATEMENTS SYBASE, INC. -------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, (In thousands, except share and per share data) 1999 1998 ------------ ------------ Current assets: Cash and cash equivalents $ 188,747 $ 224,665 Short-term investments 60,726 23,967 ------------ ------------ Total cash, cash equivalents and short-term investments 249,473 248,632 Accounts receivable, net 162,001 199,303 Deferred income taxes 20,967 20,903 Other current assets 11,285 8,862 ------------ ------------ Total current assets 443,726 477,700 Long-term investments 49,856 981 Property, equipment and improvements, net 81,711 101,433 Deferred income taxes 20,180 20,152 Capitalized software, net 35,974 35,773 Other assets 48,464 60,565 ------------ ------------ Total assets $ 679,911 $ 696,604 ============ ============ Current liabilities: Accounts payable $ 9,239 $ 12,747 Accrued compensation and related expenses 46,316 49,061 Accrued income taxes 35,091 26,736 Other accrued liabilities 92,733 112,856 Deferred revenue 178,993 190,631 Other current liabilities 1,271 1,490 ------------ ------------ Total current liabilities 363,643 393,521 Other liabilities 2,098 2,011 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; 82,561,537 shares issued and 81,738,086 outstanding (1998-81,769,334 shares issued and 81,169,334 outstanding) 83 82 Additional paid-in capital 421,204 416,501 Accumulated deficit (83,422) (102,471) Accumulated other comprehensive loss (15,649) (9,702) Cost of 823,451 shares of treasury stock (1998-600,000 shares) (8,046) (3,338) ------------ ------------ Total stockholders' equity 314,170 301,072 ------------ ------------ Total liabilities and stockholders' equity $ 679,911 $ 696,604 ============ ============
See accompanying notes. 3 4 SYBASE, INC. -------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- (In thousands, except per share data) 1999 1998 1999 1998 --------- --------- --------- --------- Revenues: License fees $ 95,703 $ 105,920 $ 193,973 $ 201,924 Services 114,484 111,950 224,482 222,763 --------- --------- --------- --------- Total revenues 210,187 217,870 418,455 424,687 Costs and expenses: Cost of license fees 8,492 8,934 20,788 19,032 Cost of services 52,110 56,064 106,152 118,846 Sales and marketing 80,884 103,412 162,169 211,846 Product development and engineering 35,385 33,260 72,563 70,393 General and administrative 17,736 14,588 34,787 31,013 Cost of restructuring (reversals) (5,619) -- (5,619) 51,694 --------- --------- --------- --------- Total costs and expenses 188,988 216,258 390,840 502,824 --------- --------- --------- --------- Operating income (loss) 21,199 1,612 27,615 (78,137) Interest income 3,112 2,040 6,399 4,742 Interest expense and other, net 469 298 222 (329) --------- --------- --------- --------- Income (loss) before income taxes 24,780 3,950 34,236 (73,724) Provision for income taxes 10,480 3,500 14,061 7,020 --------- --------- --------- --------- Net income (loss) $ 14,300 $ 450 $ 20,175 $ (80,744) ========= ========= ========= ========= Basic net income (loss) per share $ 0.17 $ 0.01 $ 0.25 $ (1.00) ========= ========= ========= ========= Shares used in computing basic net income (loss) per share 82,191 80,833 81,986 80,552 ========= ========= ========= ========= Diluted net income (loss) per share $ 0.17 $ 0.01 $ 0.24 $ (1.00) ========= ========= ========= ========= Shares used in computing diluted net income (loss) per share 83,776 80,854 83,381 80,552 ========= ========= ========= =========
See accompanying notes. 4 5 SYBASE, INC. -------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands) Six Months Ended June 30, --------------------------- 1999 1998 --------- --------- Cash and cash equivalents, beginning of year $ 224,665 $ 188,876 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) 20,175 (80,744) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 47,053 56,255 Write off of assets in restructuring (reversals) (390) 23,126 Loss on disposal of assets 2,899 -- Deferred income taxes (92) (207) Changes in assets and liabilities: Accounts receivable 35,494 21,773 Other current assets (3,470) (277) Accounts payable (3,508) (9,696) Accrued compensation and related expenses (2,745) 3,554 Accrued income taxes 8,355 (2,976) Other accrued liabilities (16,978) (4,183) Deferred revenues (11,638) (1,940) Other 52 119 --------- --------- Net cash provided by operating activities 75,207 4,804 CASH FLOWS FROM INVESTING ACTIVITIES: Restricted cash deposits -- (13,276) Purchases of available-for-sale cash investments (103,007) (20,137) Maturities of available-for-sale cash investments 9,843 18,730 Sales of available-for-sale cash investments 7,530 25,131 Business combinations, net of cash acquired (8,047) (5,000) Purchases of property, equipment and improvements (8,480) (13,721) Sale of property, equipment and improvements -- 6,808 Capitalized software development costs (8,631) (7,963) Decrease in other assets 6,961 1,225 --------- --------- Net cash used for investing activities (103,831) (8,203) CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in other current liabilities (182) (21,545) Proceeds from issuance of common stock 4,703 7,933 Proceeds from the sale of treasury stock 11,118 -- Purchases of treasury stock (16,952) (431) --------- --------- Net cash used for financing activities (1,313) (14,043) Effect of exchange rate changes on cash (5,981) (6,734) --------- --------- Net decrease in cash and cash equivalents (35,918) (24,176) Cash and cash equivalents, end of period 188,747 164,700 Cash investments, end of period 110,582 33,537 --------- --------- Total cash, cash equivalents, and cash investments, end of period $ 299,329 $ 198,237 ========= ========= Supplemental disclosures: Interest paid $ 44 $ 537 ========= ========= Income taxes paid $ 7,362 $ 8,593 ========= =========
See accompanying notes. 5 6 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, 1998 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, 1998. The results of operations for the three and six months ended June 30, 1999 are not necessarily indicative of results for the entire fiscal year ending December 31, 1999. 2. Business Combinations. In February 1999, the Company acquired Data Warehouse Network (DWN), an Ireland-based, privately held provider of packaged, industry-specific business intelligence applications. Under terms of the acquisition agreement, the Company paid $2,723,000 in cash for certain assets and assumed certain liabilities of DWN. In addition, pursuant to the terms of the agreement, the Company is obligated to make contingent payments based on certain agreed-upon performance criteria. The aggregate maximum additional amount payable over a three-year period is $5,336,000. 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 March 1999, the Company paid $5,324,000 for Convertible Secured Promissory Notes due December 31, 2002 issued by Demica PLC (Demica), a provider of a wholesale banking application using the Company's technology. The notes bear interest at 8 percent per annum and are convertible into 29.9 percent of the share capital of Demica. The Company accounts for its investment in this entity under the equity method of accounting. On February 2, 1998, Sybase acquired Intellidex Systems, L.L.C. (Intellidex), a provider of meta data management technology for deploying and managing data warehouse environments. Under terms of the acquisition agreement, Sybase paid $5,000,000 in cash for certain assets and assumed certain liabilities of Intellidex. Of the amount paid, $3,737,000 was allocated to purchased software and the balance of $1,263,000 was allocated to other intangible assets. In addition, pursuant to the terms of the agreement, Sybase is obligated to make contingent payments based on certain agreed upon performance criteria. The aggregate maximum additional amount payable 6 7 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) over a three-year period is $9,166,666. The transaction was accounted for as a purchase. The results of operations of Intellidex 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. 3. Costs of Restructuring (Reversals). In February 1998, the Company announced and began to implement a restructuring plan aimed at reducing costs, restoring profitability to operations and focusing the Company's products around its core businesses. This restructuring activity consisted primarily of terminating employees, terminating certain product lines, vacating certain facilities and canceling real estate leases as a result of the employee terminations. In the six months ended June 30, 1999, the Company reversed by credit to operating expenses $5.6 million of restructuring costs related to the 1998 restructuring activity. The significant components included: (i) approximately $1.8 million for termination payments to employees who were terminated as part of the 1998 restructuring activity but left the Company prior to their exit date, and therefore, did not qualify for termination benefits; and (ii) approximately $3.1 million related to lease cancellations and commitments where the Company was able to sublet certain closed facilities earlier than anticipated. The following table summarizes the activity related to the restructuring liability for the six months ended June 30, 1999 (in thousands):
Accrued Amounts Liabilities Accrued paid or at Liabilities at written Amounts June 30, December 31, 1998 off reversed 1999 ----------------- ------- -------- ---- Termination payments to employees and other related costs $12,483 $ 9,574 $ 1,810 $ 1,099 Lease cancellations and commitments 9,538 2,114 3,105 4,319 Costs related to closing of subsidiaries, including write-off of goodwill 2,730 2,730 -- -- Other 2,567 620 704 1,243 ------- ------- ------- ------- $27,318 $15,038 $ 5,619 $ 6,661 ======= ======= ======= =======
The Company expects that the remaining $6.7 million accrued liability balance at June 30, 1999 will be expended over the next six months. 4. Net income (loss) per share. Shares used in computing basic and diluted net income (loss) per share are based on the weighted average shares outstanding in each period, excluding treasury stock. Basic net income (loss) per share excludes any dilutive effects of stock options. Diluted net income (loss) per share includes the dilutive effect of the assumed exercise of stock options using the treasury stock method. The following table shows the computation of basic and diluted net income (loss) per share: 7 8 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per share data) Three Three Six Six Months Months Months Months Ended Ended Ended Ended 6/30/99 6/30/98 6/30/99 6/30/98 -------- -------- -------- -------- Net income (loss) $ 14,300 $ 450 $ 20,175 $(80,744) Shares used in computing basic net income (loss) per share 82,191 80,833 81,986 80,552 Effect of dilutive securities - stock options 1,585 21 1,395 -(a) -------- -------- -------- -------- Shares used in computing diluted net income (loss) per share 83,776 80,854 83,381 80,552 Basic net income (loss) per share $ 0.17 $ 0.01 $ 0.25 $ (1.00) ======== ======== ======== ======== Diluted net income (loss) per share $ 0.17 $ 0.01 $ 0.24 $ (1.00) ======== ======== ======== ========
(a) The effect of outstanding stock options is excluded from the calculation of diluted net loss per share as their inclusion would be antidilutive. 5. Comprehensive Income (Loss). The following table sets forth the calculation of comprehensive income (loss) for all periods presented:
Three Months Three Months Six Months Six Months Ended Ended Ended Ended (In thousands) June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 ------------- ------------- ------------- ------------- Net income (loss) $ 14,300 $ 450 $ 20,175 $(80,744) Foreign currency translation losses (3,903) (82) (5,947) (1,997) -------- -------- -------- -------- Comprehensive income (loss) $ 10,397 $ 368 $ 14,228 $(82,741) ======== ======== ======== ========
6. New Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (Statement 133). Statement 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. In June 1999, the FASB issued Statement No.137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which amended Statement No. 133 by deferring the effective date to the fiscal year beginning after June 30, 2000. The Company has not determined the effect, if any, that adoption will have on its financial position or results of operations. 8 9 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 financial results. However, full implementation guidelines for these standards have not been issued. Once available, the current revenue recognition accounting practices may need to change and such changes could affect the Company's future revenues and results of operations. 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 Company does not expect a material impact from the final adoption of SOP 98-9 on its future revenues and results of operations. 7. Segment Information. The Company helps businesses integrate, manage and deliver applications, content and data anywhere they are needed. The Company's software products, combined with its professional services and partner technologies, provide a comprehensive platform for delivering integrated solutions to businesses. The Company is organized into four separate business divisions, 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. The Mobile and Embedded Computing Division (MEC) provides solutions which enable customers to synchronize data seamlessly across their mobile business systems, including laptops, handheld computing devices, pagers, and intelligent appliances. 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 database management systems, warehouse design tools and central meta data management facilities. The Company reports its ESD, MEC, IAD and BID divisions as reportable segments in accordance with Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" (Statement 131). For the three months ended March 31, 1999, the results of the ESD and BID divisions were aggregated in accordance with the provisions of Statement 131. As a result of the expansion of BID's activities 9 10 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) and infrastructure, the division no longer satisfies the aggregation criteria set forth in Statement 131 and, therefore, is reported separately for the three and six months ended June 30, 1999. The Company has not presented the reportable segments discussed above for the three and six months ended June 30, 1998, since these segments were not established until 1999, and it would be impractical to restate prior periods on this basis. The Company had two reportable segments in 1998: license fees and professional services. The Company's statements of operations disclose the available data for the two reportable segments identified above for the three and six months ended June 30, 1999 and 1998. In 1999, 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 on measurable drivers of expense. Unallocated expenses represent corporate expenditures that are not specifically allocated to the segments. The Company's CODM does not view segment results below operating profit (loss), and therefore, interest income, interest expense and other, net and the provision for income taxes are not broken out by segment. The Company does not account for or report to the CODM its assets or capital expenditures by segment. A summary of the segment financial information reported to the CODM for the three months ended June 30, 1999 is presented below:
(In thousands) Consolidated ESD IAD MEC BID Elimination Total --- --- --- --- ----------- ----- Revenues: License fees $ 64,917 $ 17,103 $ 9,847 $ 3,836 $ -- $ 95,703 Services 114,278 -- -- 206 -- 114,484 -------- -------- -------- -------- -------- -------- Direct revenues from external customers 179,195 17,103 9,847 4,042 -- 210,187 Intersegment revenues 477 7,494 8,375 2,473 (18,819) -- -------- -------- -------- -------- -------- -------- Total revenues 179,672 24,597 18,222 6,515 (18,819) 210,187 Total allocated costs and expenses 159,253 21,443 13,317 7,764 (18,819) 182,958 Operating income (loss) before unallocated expenses 20,419 3,154 4,905 (1,249) -- 27,229 Unallocated expenses 6,030 -------- Operating income 21,199 Interest income and expense, net 3,581 -------- Income before income taxes 24,780
10 11 SYBASE, INC. -------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A summary of the segment financial information reported to the CODM for the six months ended June 30, 1999 is presented below:
(In thousands) Consolidated ESD IAD MEC BID Elimination Total -------- -------- -------- -------- -------- -------- Revenues: License fees $139,139 $ 32,463 $ 18,409 $ 3,962 $ -- $193,973 Services 224,097 -- -- 385 -- 224,482 -------- -------- -------- -------- -------- -------- Direct revenues from external customers 363,236 32,463 18,409 4,347 -- 418,455 Intersegment revenues 777 15,690 15,529 5,350 (37,346) -- -------- -------- -------- -------- -------- -------- Total revenues 364,013 48,153 33,938 9,697 (37,346) 418,455 Total allocated costs and expenses 327,927 41,183 25,888 15,960 (37,346) 373,612 -------- -------- -------- -------- -------- -------- Operating income (loss) before unallocated expenses 36,086 6,970 8,050 (6,263) -- 44,843 Unallocated expenses 17,228 -------- Operating income 27,615 Interest income and expense, net 6,621 -------- Income before income taxes 34,236
8. Subsequent Event. On July 20, 1999, the Board of Directors authorized the repurchase of up to an additional $75 million of the Company's outstanding common stock. The plan continued a $25 million repurchase program authorized by the Board of Directors in 1998 to allow the Company to use available cash balances to buy back its shares in open market transactions from time to time, subject to price and market conditions. As of June 30, 1999, the Company held a balance of 823,451 shares which had been repurchased under the program. 9. Litigation. Following the Company's announcement on April 3, 1995 of its preliminary results for the first fiscal 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. On April 21, 1999, the Company and all the individual defendants reached an agreement in principle with plaintiffs to settle the case for $14,800,000, of which $1,500,000 is to be paid by the Company and the remainder of which is to be paid by the Company's insurers. The Company has paid its share of the settlement to plaintiffs' escrow fund, and intends to carry out the terms of the settlement agreement. On April 29, 1999, during the time in which the settlement agreement was being formally documented, the District Court granted summary judgment in favor of the Company and all the individual defendants. Plaintiffs have appealed the judgment to the United States Court of Appeals, Ninth Circuit. 11 12 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REVENUES (DOLLARS IN MILLIONS)
Three Three Six Six Months Months Months Months Ended Ended Percent Ended Ended Percent 6/30/99 6/30/98 Change 6/30/99 6/30/98 Change ------- ------- ------ ------- ------- ------ License fees $ 95.7 $105.9 (10%) $194.0 $201.9 (4%) Percentage of total revenues 46% 49% 46% 48% Services $114.5 $112.0 2% $224.5 $222.8 1% Percentage of total revenues 54% 51% 54% 52% Total revenues $210.2 $217.9 (4%) $418.5 $424.7 (1%)
Total revenues for the three months ended June 30, 1999 decreased 4 percent to $210.2 million as compared to $217.9 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, total revenues decreased 1 percent to $418.5 million as compared to $424.7 million for the six months ended June 30, 1998. License fees revenues decreased 10% to $95.7 million in the three months ended June 30, 1999, as compared to $105.9 million for the three months ended June 30,1998. For the six months ended June 30,1999, license fees revenues decreased 4% to $194.0 million as compared to $201.9 million for the six months ended June 30,1998. The Company believes the decrease in license fees revenues is primarily due to companies continuing to reallocate available technology resources toward "Year 2000" compliance solutions. The products that contributed to the decline in license fees revenues were primarily enterprise server database products. Whether the decline 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 2 percent to $114.5 million for the three months ended June 30, 1999 as compared to $112.0 million in the three months ended June 30, 1998. For the six months ended June 30, 1999, services revenues increased 1% to $224.5 million as compared to $222.8 million in the six months ended June 30, 1998. 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. Services revenues as a percentage of total revenues increased to 54 percent for the three and six months ended June 30, 1999 as compared to 51 percent and 52 percent for the three and six months ended June 30, 1998, respectively. 12 13 GEOGRAPHICAL REVENUES (DOLLARS IN MILLIONS)
Three Three Six Six Months Months Months Months Ended Ended Percent Ended Ended Percent 6/30/99 6/30/98 Change 6/30/99 6/30/98 Change ------- ------- ------ ------- ------- ------ North American $125.8 $125.8 0% $252.8 $246.9 2% Percentage of total revenues 60% 58% 60% 58% International European $ 57.1 $ 64.1 (11%) $113.9 $127.0 (10%) Percentage of total revenues 27% 29% 27% 30% Intercontinental $ 27.3 $ 28.0 (3%) $ 51.8 $ 50.8 2% Percentage of total revenues 13% 13% 13% 12% Total International $ 84.4 $ 92.1 (8%) $165.7 $177.8 (7%) Percentage of total revenues 40% 42% 40% 42% Total revenues $210.2 $217.9 (4%) $418.5 $424.7 (1%)
North American revenues (United States, Canada and Mexico) were $125.8 million in both the three months ended June 30, 1999 and the three months ended June 30, 1998. North American revenues increased 2% to $252.8 million in the six months ended June 30, 1999 as compared to $246.9 million for the six months ended June 30, 1998. The increase during the six month period was due to higher license fees revenue in North America. International revenues decreased 8 percent and 7 percent for the three and six months ended June 30, 1999, respectively, to $84.4 million and $165.7 million, from $92.1 million and $177.8 million, respectively, for both comparable periods of 1998. European revenues decreased 11 percent and 10 percent for the three and six months ended June 30, 1999 compared to the same periods of 1998. The decrease in European revenues was primarily due to lower license fees revenues. Intercontinental revenues (Japan, Asia Pacific and South America) decreased 3 percent for the three months ended June 30, 1999 as compared to the three months ended June 30, 1998. This decrease was primarily related to lower license fees revenues. Intercontinental revenues increased 2 percent in the six months ended June 30,1999 as compared to the same period of 1998. This increase was primarily due to higher services revenues. International revenues were 40 percent of total revenues for the three and six months ended June 30, 1999, compared to 42 percent for the three and six months ended June 30, 1998. 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 unanticipated 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 foreign revenues as a percentage of total revenues in the future. 13 14 COSTS AND EXPENSES (DOLLARS IN MILLIONS)
Three Three Six Six Months Months Months Months Ended Ended Percent Ended Ended Percent 6/30/99 6/30/98 Change 6/30/99 6/30/98 Change ------- ------- ------ ------- ------- ------ Cost of license fees $ 8.5 $ 8.9 (5%) $ 20.8 $ 19.0 9% Percentage of license fees revenues 9% 8% 11% 9% Cost of services $ 52.1 $ 56.1 (7%) $ 106.2 $ 118.8 (11%) Percentage of services revenues 46% 50% 47% 53% Sales and marketing $ 80.9 $ 103.4 (22%) $ 162.2 $ 211.8 (23%) Percentage of total revenues 38% 47% 39% 50% Product development and Engineering $ 35.4 $ 33.3 6% $ 72.6 $ 70.4 3% Percentage of total revenues 17% 15% 17% 17% General and administrative $ 17.7 $ 14.6 22% $ 34.8 $ 31.0 12% Percentage of total revenues 8% 7% 8% 7% Cost of restructuring (reversals) $ (5.6) -- -- $ (5.6) $ 51.7 * Percentage of total revenues (3%) -- -- (1%) 12% --
* 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 $8.5 million and $20.8 million for the three and six months ended June 30, 1999, respectively, as compared to $8.9 million and $19.0 million for the same periods in 1998. These costs were 9 percent and 11 percent of license fees revenue for the three and six months ended June 30, 1999, respectively, as compared to 8 percent and 9 percent for the same periods in 1998. The increase in the cost of license fees in the six months ended June 30, 1999 as compared to the six months ended June 30, 1998 was primarily due to an increase in royalties payable to third parties. Amortization of purchased software and capitalized software costs included in cost of license fees was $4.9 million and $9.6 million for the three and six months ended June 30, 1999, respectively, as compared to $4.9 million and $9.8 million for the three and six months ended June 30, 1998. 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 $52.1 million and $106.2 million in the three and six months ended June 30, 1999, respectively, as compared to $56.1 million and $118.8 million for the comparable periods of 1998. These changes represent decreases of 7 percent and 11 percent for the three and six months ended June 30, 1999 as compared to the same periods of 1998. These costs decreased as a percentage of services revenues to 46 percent and 47 percent for the three and six months ended June 30, 1999, respectively, from 50 percent and 53 percent for the same periods in 1998. The decrease in cost of services in absolute dollars and as a percentage of services revenues for 14 15 both comparable periods is primarily due to a decrease in salaries, facility costs including rent, and depreciation as a result of the Company's restructuring plan initiated in 1998. Sales and Marketing. Sales and marketing expenses were $80.9 million and $162.2 million for the three and six months ended June 30, 1999, respectively, compared to $103.4 million and $211.8 million for the same periods in 1998. These changes represent decreases of 22 percent and 23 percent for the three and six months ended June 30, 1999 compared to the same periods of 1998. These costs decreased as a percentage of total revenues to 38 percent and 39 percent in the three and six months ended June 30, 1999, respectively, as compared to 47 percent and 50 percent for the same periods of 1998. The decrease in sales and marketing expenses in absolute dollars and as a percentage of total revenues for both comparable periods is primarily due to a decrease in salaries, facility costs including rent, and depreciation as a result of the Company's restructuring plan initiated in 1998. The decrease in sales and marketing was partially offset by an increase in allocated common costs. The Company allocates certain common costs including legal, litigation, 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 $35.4 million and $72.6 million in the three and six months ended June 30, 1999, respectively, as compared to $33.3 million and $70.4 million in the same periods of 1998. These costs as a percentage of total revenues increased to 17 percent in the three and six months ended June 30, 1999, as compared to 15 percent and 17 percent in the three and six months ended June 30, 1998, respectively. The increase in product development and engineering expenses in absolute dollars and as a percentage of total revenues for both comparable periods is primarily due to an increase in allocated common costs. The Company capitalized approximately $4.5 million and $8.6 million of software development costs in the three and six months ended June 30, 1999 as compared to $4.1 million and $7.6 million in the three and six months ended June 30, 1998. In the six months ended June 30, 1999, capitalized software costs included costs incurred for the development of Adaptive Server(R) Enterprise 12.0, Enterprise Application Studio(TM) 3.0, Jaguar CTS(TM) 3.0 and PowerDesigner(R) 7.0. The Company believes that product development and engineering expenditures are essential to technology and product leadership and expects product development and engineering expenditures to continue to be significant, both in absolute dollars and as a percentage of total revenues. General and Administrative. General and administrative expenses were $17.7 million and $34.8 million in the three and six months ended June 30, 1999, respectively, as compared to $14.6 million and $31.0 million in the same periods of 1998. General and administrative expenses represented 8 percent of total revenues in the three and six months ended June 30, 1999, as compared to 7 percent of total revenues in the three and six months ended June 30, 1998. The increase in general and administrative expenses for both comparable periods is primarily due to an increase in allocated common costs. Cost of Restructuring (Reversals). The Company incurred restructuring charges in the amount of $51.7 million and $22.5 million in the first and fourth quarters of 1998, respectively. As a result of a 15 16 substantial loss incurred during 1997, the Company formulated a restructuring plan, which was instituted in February 1998 ("the 1998 Plan"). The 1998 Plan was intended to significantly reduce annual operating expenses by realigning the Company's resources around its core product initiatives. Under the 1998 Plan, the Company estimated restructuring charges of $70 million to be incurred during 1998. The 1998 Plan included the termination of approximately 1,100 employees, the termination of certain product offerings including Sybase MPP(TM), certain APT products, dbQueue(TM), Web. SQL(TM), Lego Rom and Powerbuilder(R) for Mac, the consolidation or closure of more than 30 facilities worldwide, and the closure of subsidiaries in Thailand, Peru, Chile, Venezuela and Mexico. The Company believes the restructuring actions taken achieved the desired result as the Company has been able to reduce its overall cost structure. In the six 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 significant components included: (i) approximately $1.8 million for termination payments to employees who were terminated as part of the 1998 Plan but left the Company prior to their exit date, and therefore, did not qualify for termination benefits; and (ii) approximately $3.1 million related to lease cancellations and commitments where the Company was able to sublet certain closed facilities earlier than anticipated. The following table summarizes the activity related to the restructuring liability for the six months ended June 30, 1999:
Accrued (IN MILLIONS) Accrued Amounts Liabilities at Liabilities at paid or Amounts June 30, December 31, 1998 written off reversed 1999 ----------------- ----------- -------- ---- Termination payments to employees and other related costs $12,483 $ 9,574 $ 1,810 $ 1,099 Lease cancellations and commitments 9,538 2,114 3,105 4,319 Costs related to closing of subsidiaries, including write-off of goodwill 2,730 2,730 -- -- Other 2,567 620 704 1,243 ------- ------- ------- ------- $27,318 $15,038 $ 5,619 $ 6,661 ======= ======= ======= =======
The Company expects that the remaining $6.7 million accrued liability balance at June 30, 1999 will be expended over the next six months. OPERATING INCOME (LOSS) (DOLLARS IN MILLIONS)
Three Three Six Six Months Months Months Months Ended Ended Percent Ended Ended Percent 6/30/99 6/30/98 Change 6/30/99 6/30/98 Change ------- ------- ------ ------- ------- ------ Operating income (loss) $ 21.2 $ 1.6 * $ 27.6 ($ 78.1) * Percentage of total revenues 10% 1% 7% (18%) Operating income (loss) exclusive of cost of restructuring (reversals) $ 15.6 $ 1.6 * $ 22.0 ($ 26.5) * Percentage of total revenues 7% 1% 5% (6%)
- ---------- * Not meaningful 16 17 Operating income was $15.6 million and $22.0 million for the three and six months ended June 30, 1999, respectively (exclusive of cost of restructuring reversals of $5.6 million), compared to operating income of $1.6 million and an operating loss of $26.5 million (exclusive of $51.7 million cost of restructuring charges) in the three and six months ended June 30, 1998, respectively. The increase in operating income in both comparable periods is primarily related to a reduction in expenses associated with the 1998 Plan. OTHER INCOME AND EXPENSE, NET (DOLLARS IN MILLIONS)
Three Three Six Six Months Months Months Months Ended Ended Percent Ended Ended Percent 6/30/99 6/30/98 Change 6/30/99 6/30/98 Change ------- ------- ------ ------- ------- ------ Interest income $ 3.1 $ 2.0 53% $ 6.4 $ 4.7 35% Percentage of total revenues 1% 1% 2% 1% Interest expense and other, net $ 0.5 $ 0.3 57% $ 0.2 $ (0.3) * Percentage of total revenues * * * *
- ---------- * Not meaningful Other income and expense, net consists primarily of interest earned on cash investments, expenses from bank fees and net gains and losses resulting from the Company's foreign currency transactions and related hedging activities, including the cost of hedging foreign currency exposures. Interest income in absolute dollars for the three and six months ended June 30, 1999 increased $1.1 million and $1.7 million, respectively, as compared to the three and six months ended June 30,1998. This increase is due primarily to larger average invested cash balances in 1999. The decrease in interest expense and other, net, in absolute dollars for the three and six months ended June 30, 1999, as compared to the three and six months ended June 30, 1998, is primarily due to lower net costs of hedging activities and net gains resulting from the Company's foreign currency transactions. PROVISION FOR INCOME TAXES (DOLLARS IN MILLIONS)
Three Three Six Six Months Months Months Months Ended Ended Percent Ended Ended Percent 6/30/99 6/30/98 Change 6/30/99 6/30/98 Change ------- ------- ------ ------- ------- ------ Provision for income taxes $10.5 $3.5 199% $14.1 $7.0 100%
The Company recorded income tax provisions of $10.5 million and $14.1 million in the three and six months ended June 30, 1999, respectively, as compared $3.5 million and $7.0 million in the three and six months ended June 30, 1998. The income tax provisions for these periods are primarily the result of tax on earnings generated from operations and withholding taxes on revenues in certain international jurisdictions. The Company had net deferred tax assets of $41.1 million at June 30, 1999. The deferred tax assets were net of a valuation allowance of $42.6 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 17 18 and from tax credit carryforwards. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced and any such adjustments could have a material adverse impact on the Company's effective tax rate and results of operations in future periods. NET INCOME (LOSS) PER SHARE (DOLLARS AND SHARES IN MILLIONS)
Three Three Six Six Months Months Months Months Ended Ended Percent Ended Ended Percent 6/30/99 6/30/98 Change 6/30/99 6/30/98 Change ------- ------- ------ ------- ------- ------ Net income (loss) $ 14.3 $ 0.4 * $ 20.2 $(80.7) * Percentage of total revenues 7% 0% 5% (19%) Basic net income (loss) per share $ 0.17 $ 0.01 * $ 0.25 $(1.00) * Diluted net income (loss) per share $ 0.17 $ 0.01 * $ 0.24 $(1.00) * Shares used in computing basic net income (loss) per share 82.2 80.8 2% 82.0 80.6 2% Shares used in computing diluted net income (loss) per share 83.8 80.9 4% 83.4 80.6 4%
- ---------- Note - The effect of outstanding stock options is excluded from the calculation of diluted net loss per share as their inclusion would be antidilutive. * Not meaningful The Company reported net income of $14.3 million and $20.2 million in the three and six months ended June 30, 1999, respectively, as compared to net income of $0.4 million and a net loss of $80.7 million in the three and six months ended June 30,1998, respectively. The net income in the three and six months ended June 30, 1999 includes a pre-tax benefit from cost of restructuring reversals of $5.6 million. The net loss in the six months ended June 30, 1998 includes pre-tax cost of restructuring charges of $51.7 million. The increase in net income for the three and six months ended June 30, 1999 as compared to the same period of 1998 is primarily due to the implementation of the 1998 Plan which occurred in the first and fourth quarters of 1998. See "Cost of Restructuring (Reversals)." LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN MILLIONS)
Six Six Months Months Ended Ended Percent 6/30/99 6/30/98 Change ------- ------- ------ Working capital $ 80.1 $ 26.0 208% Cash, cash equivalents and cash investments $ 299.3 $ 198.2 51% Net cash provided by operating activities $ 75.2 $ 4.8 * Net cash used for investing activities $ 103.8 $ 8.2 * Net cash used for financing activities $ 1.3 $ 14.0 (91%)
- --------------- * Not meaningful Net cash provided by operating activities was $75.2 million for the six months ended June 30, 1999 compared to $4.8 million for the six months ended June 30, 1998. This increase was largely attributable to the $100.9 million increase in net income (loss) for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998. Depreciation and amortization charges, 18 19 which are included in the net income (loss), but do not require the use of cash, amounted to $47.1 million for the six months ended June 30, 1999 compared to $56.3 million in the six months ended June 30, 1998. This decrease in depreciation and amortization was primarily due to the write-off of assets in connection with the 1998 Plan. Additionally, net cash provided by operating activities reflects a decrease in accounts receivable of $35.5 million in the six months ended June 30, 1999 as compared to a decrease of $21.8 million in the six months ended June 30, 1998. Net cash used for investing activities increased to $103.8 million for the six months ended June 30, 1999 compared to $8.2 million in the six months ended June 30, 1998. Investing activities included capital expenditures of $8.5 million for the six months ended June 30, 1999 compared to $13.7 million in the same period for 1998. This decrease reflects a reduction in capital expenditures required to support the Company's employee base as well as the associated systems and infrastructure. The Company's headcount was reduced to 4,074 at June 30, 1999 from 4,773 at June 30, 1998. Additionally, for the six months ended June 30, 1999, investing activities included $8.0 million of cash used for business combinations compared to $5.0 million in the six months ended June 30, 1998, as well as net purchases of investments amounting to $85.6 million in the six months ended June 30, 1999 compared to net redemptions of $23.7 million in the six months ended June 30, 1998. Also, in the six months ended June 30, 1998, the Company collateralized its obligation to a lessor by pledging $13.3 million in cash deposits. Net cash used for financing activities for the six months ended June 30, 1999 was $1.3 million compared to net cash used for financing activities of $14.0 million in the same period for 1998. The net cash used for financing activities for the six months ended June 30, 1999 was primarily due to the repurchase by the Company of its common stock, partially offset by the issuance of common stock and the sale of treasury stock associated with the Company's stock option and employee stock purchase plans. The Company engages in business operations around the world and is therefore exposed to foreign currency fluctuations. As of June 30, 1999, the Company had identifiable assets totaling $153.0 million associated with its European operations and $73.2 million associated with its Intercontinental operations. The Company experiences foreign exchange transaction exposure from certain balances denominated in different currencies. The Company hedges certain of these short-term exposures under a plan approved by the Board of Directors (see "Qualitative and Quantitative Disclosure of Market Risk"). The Company also experiences foreign exchange translation exposure on its net assets denominated in different currencies. As certain of these net assets are considered by Sybase, Inc., the U.S. parent company, to be a permanent investment in the respective subsidiaries, the related foreign currency translation gains and losses are reflected in an accumulated other comprehensive loss account in stockholders' equity. Cash, cash equivalents and cash investments totaled $299.3 million at June 30, 1999, compared to $198.2 million at June 30, 1998. During the six months ended June 30, 1999, the Company repurchased 1.9 million shares of its common stock for $17.0 million pursuant to the Board of Directors' authorization in February 1998 to repurchase up to $25.0 million of the Company's outstanding common stock. 19 20 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 operating programs. FUTURE OPERATING RESULTS The Company's future operating results may vary substantially from period to period. The price of the Company's common stock will fluctuate in the future, and an investment in the Company's common stock is subject to a variety of significant risks, including but not limited to the specific risks identified below. The results of operations for the three and six months ended June 30, 1999 are not necessarily indicative of results for the year ending December 31, 1999 or any other future period. Expectations, forecasts, and projections by the Company or others are by nature forward-looking statements, and future results cannot be guaranteed. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Inevitably, some investors in the Company's securities will experience gains while others will experience losses depending on the prices at which they purchase and sell securities. Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this report. The timing and amount of the Company's revenues from license fees are subject to a number of factors that make estimation of revenues and operating results prior to the end of a quarter extremely uncertain. Sybase has generally experienced a seasonal pattern of license fees revenues decline between the fourth quarter and the succeeding first quarter contributing to lower total revenues and operating earnings in the first quarter compared to the prior fourth quarter. The Company has operated historically with little or no backlog and, as a result, license fees revenues in any quarter are dependent on orders booked and shipped in that quarter. In addition, the timing of closing of large license agreements increases the risk of quarter-to-quarter fluctuations and the uncertainty of estimating quarterly operating results. The Company has experienced a pattern of recording 50 percent to 70 percent of its quarterly license fees revenues in the third month of the quarter, with a concentration of such revenues in the last two weeks of such third month. The Company's operating expenses are based on projected annual and quarterly revenue levels and are incurred approximately ratably throughout each quarter. Because the Company's operating expenses are relatively fixed in the short term, if projected revenues are not realized in the expected period, the Company's operating results for that period would be adversely affected and could result in an operating loss, as occurred in the first quarter of 1998. Failure to achieve revenues, earnings, and other operating and financial results as forecast or anticipated by brokerage firms and industry analysts has previously resulted in, and in the future could result in, an immediate and substantial adverse effect on the market price of the Company's stock. The Company may not achieve, in the future, the relatively high rates of growth experienced by the Company in and prior to 1994 or the rates of growth projected for the software markets in which Sybase competes. The Company recently realigned its sales force, product teams and professional services capabilities into four new divisions, each one focused upon one of four key markets: Enterprise Solutions, Mobile and Embedded Computing, Internet Applications and Business Intelligence. This reorganization took effect in January 1999. Although such changes are intended to enhance overall revenues and profitability, they could, in the short-term, materially and adversely affect the Company's 20 21 sales process, revenues and results of operations. There have been a number of changes in the Company's executive management. In the fall of 1998, the Company completed an executive management transition pursuant to which John Chen became the Company's Chief Executive Officer and Chairman of the Board. In early 1999, Pieter Van der Vorst became the Company's Chief Financial Officer, and Pamela George was named Vice President of Corporate Marketing. The Company's divisional reorganization also resulted in the appointment of one general manager for each division, and a number of other executive reassignments at the end of 1998 and beginning of 1999. The Company will make other management and organization changes in the future. Organizational and management changes are intended to enhance productivity and competitiveness. However, such changes may not produce the desired results and could materially adversely affect the Company's results of operations. The market for the Company's stock is highly volatile. The trading price of the Company's common stock has fluctuated widely from 1995 through 1999 and may continue to fluctuate in the future in response to quarterly variations in operating and financial results, announcements of technological innovations, new products, or customer contracts won by the Company or its competitors. Changes in prices of the Company's or its competitors' products and services, changes in product mix, changes in the Company's revenues and revenue growth rates for the Company as a whole or for individual geographic areas, business units, products or product categories, as well as other events or factors could also affect the Company's stock prices. Statements or changes in opinions, ratings or earnings estimates made by brokerage firms and industry analysts relating to the market in which the Company does business, the Company's competitors, or the Company or its products specifically, have resulted, and could in the future result, in an immediate and adverse effect on the market price of the Company's common stock. For example, due to a variety of factors, the Company's stock price declined significantly during the first quarter of 1996 and the first quarter of 1998. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that have particularly affected the market price for many high technology companies even though such fluctuations often have been unrelated to the operating performance of these companies. An increased portion of the Company's revenues in recent quarters has been derived from its international operations. In the six months ended June 30, 1999 revenues from its international operations represented 40 percent of the Company's total revenues. In 1998 and 1999, the Company closed subsidiaries in Mexico, Thailand, Chile, Peru and Venezuela. In addition, there have been several management and organizational changes within the international operations. For example, during 1998 and 1999, the country managers in Australia, Switzerland and Japan and the European General Manager resigned or were replaced. International revenues, in absolute dollars and as a percentage of total revenues, may fluctuate in part due to the growth and, in some cases, the relative immaturity or closure of international organizations. The Company's operations and financial results could be significantly affected by factors associated with international operations such as changes in foreign currency exchange rates and uncertainties relative to regional economic circumstances, the introduction of the Euro currency unit, political instability in emerging markets, and difficulties in staffing and managing foreign operations, as well as other risks associated with international activities. For example, the economic unrest and currency devaluations in Asia in late 1997 adversely affected collection of receivables, particularly dollar denominated receivables and the recognition of revenue since the fourth quarter of 1997. 21 22 The market for the Company's software products and services is extremely competitive and characterized by dynamic customer demands, rapid technological and marketplace changes, and frequent product enhancements and new product introductions. The Company competes with a number of companies, including Oracle Corporation, Microsoft Corporation, Informix Corporation, IBM Corporation, and Computer Associates, Inc. Many of the Company's competitors and potential competitors have significantly greater financial, technical, sales, and marketing resources, and a larger installed base than the Company. In addition, many of these competitors offer additional categories of products, such as operating systems, that the Company does not offer and which may provide those companies with a competitive advantage in various circumstances. New or enhanced products, many of which have been announced and many of which are continually introduced by existing or future competitors in the software industry, could increase the competition faced by the Company's products from time to time and result in greater price pressure on certain of the Company's products, especially to the extent that market acceptance for personal computer-oriented and Windows NT technologies increases at the expense of UNIX-based systems. A failure by the Company to compete successfully with its existing competitors or with new competitors could have a material adverse effect on the Company's business and results of operations and on the market price of the Company's common stock. The Company's future results of operations will depend in part on its ability to enhance existing products and to introduce new products that meet dynamic customer requirements on a timely and cost-effective basis. Customer requirements for products can rapidly change as a result of innovations or changes within the computer hardware and software industries. For example, the widespread use of the Internet is rapidly giving rise to new customer requirements as well as new methods and practices of selling, marketing, and distributing products and services. Sybase's future results will depend in part on its success in developing new products, making generally available products that have been previously announced, enhancing its existing products and adapting its existing products to changing customer requirements, and ultimately gaining market acceptance for such new or enhanced products. In the second quarter of 1999, the Company announced general availability of Sybase Financial Server(TM) 1.0, an e-commerce application platform for securities trading and electronic banking, as well as Enterprise Application Studio(TM) 3.0, a complete suite of integrated application development and deployment products including Enterprise Application Server(TM) 3.0, PowerJ(TM) 3.0 and PowerBuilder(R) 7.0. The Company also announced availability of four Industry Warehouse Studios(TM) for the healthcare, telecommunications, insurance and retail banking industries. Each product set includes packaged applications for company-specific customization and data warehouse management. Earlier in the year, the Company released the latest version of Adaptive Server(R) Anywhere, which includes the UltraLite(TM) deployment option, an application-optimized ultra-small database that resides locally on handheld devices and embedded systems, and Mobilink two-way enterprise server synchronization technology for the Windows CE operating system and 3Com Palm Computing platform. The creation of certain integrated product sets is intended to enhance the ability of the Company's partners and direct sales force to market and sell more complete solutions to customers in a single package. While such integration is intended to improve productivity, revenues and profitability, the elimination of the availability of individual products subsumed within integrated product sets could have an adverse effect on license fees and service revenues, particularly if such product sets are not well received in the marketplace. 22 23 Sybase's results of operations will also depend increasingly on the ability of its products to interoperate and perform well with existing and future leading, industry-standard application software products intended to be used in connection with relational database management systems (RDBMSs). Failure to meet existing or future interoperability and performance requirements of certain independent vendors marketing such applications in a timely manner has in the past and could in the future adversely affect the market for Sybase's products. Certain leading applications are not interoperable with Sybase RDBMSs, and others may never be available on Sybase's RDBMSs. In addition, the Company's application development tools, database design tools, and certain connectivity products are designed for use with RDBMSs offered by the Company's competitors. Vendors of non-Sybase RDBMSs and related products may become less willing in the future to provide the Company with access to products, technical information, and marketing and sales support. If existing and potential customers of the Company who use non-Sybase RDBMSs refrain from purchasing such products due to concerns that the development, quality, and support of products for non-Sybase RDBMSs will diminish over time, the Company's business, results of operations, and financial condition could be materially and adversely affected. The Company's products are used by many customers to build and deploy their own custom applications. Increased reliance on prepackaged applications and diversion of internal information technology budgets to rectify Year 2000 compliance issues has and may in the future continue to have the effect of reducing the internal development of custom applications overall. Such a reduction has and may in the future continue to have a material and adverse impact on the market for the Company's products and the Company's business, results of operations and financial condition. Furthermore, many products licensed by the Company contain components developed by third parties. If the Company's products or such third party products are not Year 2000 compliant, or cannot be determined to be compliant, market acceptance of the Company's products could be adversely affected. Commercial acceptance of the Company's products and services could be adversely affected by critical or negative statements or reports by brokerage firms, industry and financial analysts, and industry periodicals concerning the Company and its products, business, or competitors, or by the advertising or marketing efforts of competitors that could affect customer perception. In addition, customer perception of Sybase and its products could be adversely affected by financial results, particularly revenues and profitability, reported for the 1999 fiscal year or future periods, by reductions in the applicable market share of the Company's products and by related press reports. The Company's ability to achieve its future revenues and earnings will depend in part on the ability of its officers and key personnel to manage growth, costs, and expenses successfully through the implementation of appropriate management systems and controls. Failure to effectively implement or maintain such systems and controls could adversely affect the Company's business and results of operations. The success of the Company also depends in part on its ability to attract and retain qualified technical, managerial, sales, and marketing personnel. The competition for such personnel is intense in the software industry and, Sybase believes, has increased substantially in recent years. There have been a number of recent changes in the Company's executive management team, including the appointment in 1998 of John Chen as the Company's Chief Executive Officer and Chairman of the Board, and the appointment in early 1999 of Pieter Van der Vorst as Chief Financial Officer, and Pamela George as Vice President of Corporate Marketing. Moreover, in connection with the Company's reorganization into four operating divisions and the appointment of one general manager for each division, a number of executives 23 24 changed responsibilities at the end of 1998 and in early 1999. Further changes in management, the reduction in the overall number of Sybase employees made during 1998, and the Company's financial and stock price performance relative to companies with which Sybase competes for employees, could affect the amount of employee turnover. The Company has experienced in recent quarters a high rate of employee turnover. The failure to effectively recruit, train, and retain qualified personnel or high rates of employee turnover, particularly among consulting, engineering or sales staff, could adversely affect the Company's product development efforts, sales of products and services and other aspects of the Company's operations and results. Sybase currently ships most of its products in North America from its Emeryville, California and Massachusetts distribution facilities. Because of the pattern of recording a high percentage of quarterly revenues within the last two weeks of the quarter, the closure or inoperability of one or more of these facilities (or a disruption of business operations generally) during such weeks due to natural calamity or due to a systems or power failure could have a material adverse effect on the Company's ability to record revenues for such quarter and, therefore, on the overall results of operations for such quarter. The Company has acquired a number of companies in the past. During 1998, the Company acquired Intellidex Systems, L.L.C., a provider of meta data management technology for deploying and managing data warehouse environments. In 1999, the Company acquired Data Warehouse Network Limited, a provider of industry specific data warehouse solutions and purchased debt instruments convertible into a 29.9 percent interest in Demica PLC, a provider of a wholesale banking application using the Company's technology. The Company will likely acquire other distributors, companies, products, or technologies in the future. The achievement of the desired benefits of these and future acquisitions will depend in part upon whether the integration of the acquired businesses is achieved in an efficient and effective manner. The successful combination of businesses will require, among other things, integration of the companies' related product offerings and coordination of their sales, marketing, and research and development efforts. The difficulties of such coordination may be increased by the geographic distance between separate organizations. The Company may be unable to integrate effectively these or future acquired businesses and may not obtain the anticipated or desired benefits of such acquisitions. Such acquisitions may result in costs, liabilities, or additional expenses that could adversely affect the Company's results of operations and financial condition. In addition, acquisitions or changes in business or market conditions may cause the Company to revise its plans, which could result in unplanned expenses or a loss of anticipated benefits from past investments. During 1998, the Company incurred restructuring charges of $74.2 million. The Company does not currently anticipate that it will incur additional restructuring charges in 1999 and has recorded cost of restructuring reversals of $5.6 million in the second quarter of 1999. However, as this is a forward-looking statement, future actual results may differ based on the actual results of operations experienced in 1999 and the various factors described above that affect future results. Effective January 1, 1998, the Company adopted the American Institute of Certified Public Accountants (AICPA) Statement of Position No. 97-2, "Software Revenue Recognition" (SOP 97-2), which supercedes SOP 91-1 and which prohibits the restatement of prior financial statements. SOP 97-2 addresses software revenue recognition matters primarily from a 24 25 conceptual level and detailed implementation guidelines have not been issued. In March 1998, the AICPA issued Statement of Position No. 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition", which defers for one year the application of certain provisions of SOP 97-2. These provisions limit what is considered vendor-specific objective evidence of the fair value of the various elements in a multiple-element arrangement. All other provisions of SOP 97-2 remain in effect. These and future changes to, and interpretations of, accounting standards and rules could adversely affect the amount and timing of recognition of revenue. YEAR 2000 The Company is aware of and is addressing the issues associated with the programming code in existing computer systems as the year 2000 approaches. The "Year 2000" issue is pervasive and complex, as many computer systems will be affected in some way by the rollover of the two-digit year value to 00. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The "Year 2000" issue creates potential risk for the Company from unforeseen problems in its own computer systems, from third parties with whom the Company deals on financial transactions worldwide and in its own software products licensed to customers. Failures of the Company's and/or third parties' computer systems could have a material impact on the Company's ability to conduct its business. Not all products previously licensed by the Company meet current standards for Year 2000 compliance, and many of these products are still in use by customers. Complex software products, such as the type licensed by the Company and its competitors, generally are not completely free from "bugs" and other defects. The existence of such "bugs" may give rise to legal claims against the Company, notwithstanding standard provisions in the Company's license agreements with its customers disclaiming express and implied warranties against such errors. Such legal claims or claims that products previously licensed by the Company are not Year 2000 compliant could have a material adverse impact on the Company's business and results of operations. As of March 1999, the Company completed its assessment of all of its critical worldwide infrastructure systems (e.g., computer and telephone systems) and business systems (e.g., revenue, sales and marketing and finance functions) and also completed much of the remedial work necessary to make these systems Year 2000 compliant. The outstanding list of such nonconforming applications and systems is small and the Company believes it has identified upgrade or replacement solutions to make all of these systems Year 2000 compliant. Most outstanding items are scheduled for installation of certified upgrades from suppliers, which have been received, and the Company expects to effect all solutions by September 1999. The Company believes that the risk of Year 2000 problems in the Company's internal applications has been low because the Company's systems are generally run using its own technology and its partners' products, and relatively little development work other than assessment and testing has been required to insure Year 2000 compliance. Notwithstanding the foregoing, there is no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and that they will not have an adverse effect on the Company's systems. As such, the Company is in the process of developing a contingency plan in the event its internal systems are not converted on a timely basis. The Company does not believe that the cost of such actions will have a material adverse effect on the Company's results of operations or financial condition. There are no assurances, however, that there will not be a delay in, or increased cost 25 26 associated with, the implementation of such changes, and the Company's inability to implement such changes could have an adverse effect on future results of operations. Factors that could cause unusual costs and delays include the availability and cost of personnel trained in this area, and the ability to locate and correct all relevant computer codes and other uncertainties. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 the caption "Future Operating Results." As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company's financial position and results of operations. Historically, the Company's primary exposures have related to nondollar-denominated sales and expenses in Europe, Asia Pacific, including Japan and Australia, and Latin America. In order to reduce the effect of foreign currency fluctuations, the Company hedges its exposure on certain transactional balances that are denominated in foreign currencies through the use of foreign currency forward exchange contracts. For the most part, these exposures consist of intercompany accounts receivable owed to the Company as a result of local sales of software licenses by the Company's international subsidiaries. The majority of these exposures are denominated in European and Asia Pacific currencies, primarily the Euro and Hong Kong dollar. These forward exchange contracts are recorded at fair value and are short-term in nature (usually 30 days or less). At June 30, 1999, the Company had forward exchange contracts to exchange various foreign currencies for U.S. dollars, Euro and Hong Kong dollars in the amounts of $6,793,000, $7,863,000 and $1,542,000, respectively, and to exchange U.S. dollars and Euro dollars into various foreign currencies in the amounts of $18,247,000 and $4,676,000, respectively. Neither the cost nor the fair value of these foreign currency forward exchange contracts was material at June 30, 1999. One major U.S. multinational bank is counterparty to substantially all of these contracts. The Company maintains an investment portfolio holding of various issuers, types and maturities. These securities are generally classified as available for sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders' equity, net of tax, if material. Unrealized gains and losses at June 30, 1999 were not material. The Company's investments consisted primarily of short-term money market instruments. Of the Company's cash equivalent and cash investment balances of $299,329,000 at June 30, 1999, approximately 60 percent have maturity dates of less than 180 days, and 40 percent of this balance have maturities of 180 days to two years. The Company does not believe its exposure to interest rate risk is material given the short-term nature of its investment portfolio. 26 27 PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS Following the Company's announcement on April 3, 1995 of its preliminary results for the first fiscal 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. On April 21, 1999, the Company and all the individual defendants reached an agreement in principle with plaintiffs to settle the case for $14,800,000, of which $1,500,000 is to be paid by the Company and the remainder of which is to be paid by the Company's insurers. The Company has paid its share of the settlement to plaintiffs' escrow fund, and intends to carry out the terms of the settlement agreement. On April 29, 1999, during the time in which the settlement agreement was being formally documented, the District Court granted summary judgment in favor of the Company and all the individual defendants. Plaintiffs have appealed the judgment to the United States Court of Appeals, Ninth Circuit. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Registrant was held on May 27, 1999. At the Annual Meeting, the following matters were submitted to a vote of stockholders and were approved, with the votes cast on each matter indicated: 1. Election of two Class I directors, each to serve a three-year term expiring upon the 2002 Annual Meeting of Stockholders or until a successor is duly elected and qualified. John S. Chen and Alan B. Salisbury were the only nominees and each was elected (73,133,110 votes were cast for election of Mr. Chen and 967,269 were cast withholding authority to vote for his election; 73,174,306 votes were cast for election of Mr. Salisbury and 926,073 were cast withholding authority to vote for his election). There were no abstentions or non-votes. In addition to these directors, the Company's incumbent directors (Robert S. Epstein, Richard C. Alberding, L. William Krause, Robert P. Wayman and Jeffrey T. Webber) had terms that continued after the 1999 Annual Meeting. 2. Approval of an amendment to the 1996 Stock Plan increasing the total number of shares of Common Stock reserved for issuance thereunder by 1,800,000 shares (58,630,497 for, 14,190,486 votes against, 311,792 abstentions, and 967,604 non-votes.) 3. Approval of an amendment to the Amended and Restated 1991 Employee Stock Purchase Plan and the Amended and Restated 1991 Foreign Subsidiary Employee Stock Purchase Plan increasing the total number of shares of Common Stock reserved for issuance thereunder by 2,300,000 shares (69,990,899 for, 2,837,292 against, 304,584 abstentions, and 967,604 non-votes.) 4. Approval of an amendment to the 1992 Director Stock Option Plan increasing the amount of the annual stock option grant made to nonemployee directors from 12,000 shares to 16,000 shares (65,264,341 for, 7,481,674 against, 386,760 abstentions, and 967,604 non-votes.) 27 28 5. Approval of an amendment to the Restated Certificate of Incorporation to reorganize the Board of Directors into a single class (39,930,736 for, 1,317,523 against, 333,064 abstentions, and 32,519,056 non-votes.) 6. Ratification of the appointment of Ernst & Young LLP as independent auditors for the year ending December 31, 1999 (73,566,707 for, 312,858 against, 220,814 abstentions and no non-votes.) ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K: None. 28 29 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. August 12, 1999 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) 29 30 EXHIBIT INDEX TO SYBASE, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
Exhibit Number Description - -------------- ----------- 27 Financial Data Schedule
30 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF SYBASE INC. AS OF JUNE 30, 1999 AND FOR THE YEARS THEN ENDED. 1,000 YEAR DEC-31-1999 JAN-01-1999 JUN-30-1999 188,747 60,726 189,435 (27,434) 0 443,726 369,494 (287,783) 679,911 363,643 0 0 0 83 421,204 679,911 193,973 418,455 20,788 106,152 72,563 0 44 34,236 14,061 20,175 0 0 0 20,175 0.25 0.24
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