<PAGE> 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, 1998
[ ] 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
Incorporation or Organization) (I.R.S. Employer 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 June 30, 1998, 80,825,413 shares of the Registrant's Common Stock, $.001 par
value, were outstanding.
<PAGE> 2
SYBASE, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 1998 3
and December 31, 1997
Condensed Consolidated Statements of Operations for the three months and 4
the six months ended June 30, 1998 and June 30, 1997
Condensed Statements of Stockholders' Equity for the six months ended 5
June 30, 1998 and June 30, 1997
Condensed Consolidated Statements of Cash Flows 6
for the six months ended June 30, 1998 and
June 30, 1997
Notes to Condensed Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Part II: Other Information
Item 4: Submission of Matters to a Vote of Security Holders 25
Item 6: Exhibits and Reports on Form 8-K 25
Signature 26
</TABLE>
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<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
SYBASE, INC.
------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands, except share data) 1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 164,700 $ 188,876
Short-term cash investments 27,541 47,127
--------- ---------
Total cash, cash equivalents and short-term cash investments 192,241 236,003
Accounts receivable, net 180,909 204,411
Deferred income taxes 17,181 16,973
Other current assets 18,308 18,274
--------- ---------
Total current assets 408,639 475,661
Long-term cash investments 5,996 10,134
Property, equipment and improvements, net 121,579 149,661
Deferred income taxes 24,076 24,077
Capitalized software, net 42,301 44,208
Restricted cash deposits 13,276 --
Other assets 64,734 77,884
--------- ---------
Total assets $ 680,601 $ 781,625
========= =========
Current liabilities:
Accounts payable $ 9,825 $ 19,521
Accrued compensation and related expenses 47,528 43,974
Accrued income taxes 28,824 31,800
Other accrued liabilities 102,536 95,476
Deferred revenue 168,533 170,473
Other current liabilities 25,362 46,907
--------- ---------
Total current liabilities 382,608 408,151
Other liabilities 1,717 1,959
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; 80,825,413 shares issued
and outstanding (1997-79,998,287) 81 80
Additional paid-in capital 405,857 397,925
Accumulated deficit (90,087) (9,343)
Accumulated translation adjustments (19,144) (17,147)
Treasury stock; 50,000 shares of common stock (431) --
--------- ---------
Total stockholders' equity 296,276 371,515
--------- ---------
Total liabilities and stockholders' equity $ 680,601 $ 781,625
========= =========
</TABLE>
See accompanying notes.
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<PAGE> 4
SYBASE, INC.
------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -----------------------------
(In thousands, except per share data) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 105,920 $ 110,591 $ 201,924 $ 237,983
Services 111,950 104,890 222,763 209,699
--------- --------- --------- ---------
Total revenues 217,870 215,481 424,687 447,682
Costs and expenses:
Cost of license fees 8,934 6,148 19,032 14,206
Cost of services 56,064 61,673 118,846 123,551
Sales and marketing 103,412 116,674 211,846 231,271
Product development and engineering 33,260 33,707 70,393 69,007
General and administrative 14,588 14,443 31,013 31,806
Cost of restructuring -- -- 51,694 --
--------- --------- --------- ---------
Total costs and expenses 216,258 232,645 502,824 469,841
--------- --------- --------- ---------
Operating income (loss) 1,612 (17,164) (78,137) (22,159)
Interest income 2,040 2,200 4,742 4,113
Interest expense and other, net 298 (471) (329) (1,378)
--------- --------- --------- ---------
Income (loss) before income taxes 3,950 (15,435) (73,724) (19,424)
Provision for income taxes 3,500 2,357 7,020 4,528
--------- --------- --------- ---------
Net income (loss) $ 450 ($ 17,792) ($ 80,744) ($ 23,952)
========= ========= ========= =========
Basic net income (loss) per share $ 0.01 ($ 0.23) ($ 1.00) ($ 0.31)
========= ========= ========= =========
Shares used in computing basic net income (loss) per share 80,833 78,659 80,552 78,030
========= ========= ========= =========
Diluted net income (loss) per share $ 0.01 ($ 0.23) ($ 1.00) ($ 0.31)
========= ========= ========= =========
Shares used in computing diluted net income (loss) per share 80,854 78,659 80,552 78,030
========= ========= ========= =========
</TABLE>
See accompanying notes.
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<PAGE> 5
SYBASE, INC.
------------------
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Retained Accumulated
Common Additional Earnings Other
---------------- Paid-In Treasury (Accumulated Comprehensive
(In thousands) Shares Amount Capital Stock Deficit) Loss Total
------ ------ ------- ----- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 76,609 $77 $359,161 $ -- $46,081 ($8,511) $396,808
Common stock issued in connection
with business combinations 750 1 11,999 12,000
Common stock issued under stock
option and stock purchase plans 1,416 1 11,891 -- -- -- 11,892
------ -- ------- ---- ------ ------- -------
Subtotal 78,775 79 383,051 -- 46,081 (8,511) 420,700
------ -- ------- ---- ------ ------- -------
Net loss -- -- -- -- (23,952) -- (23,952)
Foreign currency translation
adjustment -- -- -- -- -- (6,165) (6,165)
------ -- ------- ---- ------ ------- -------
Comprehensive loss -- -- -- -- (23,952) (6,165) (30,117)
------ -- ------- ---- ------ ------- -------
Balances at June 30, 1997 78,775 $79 $383,051 $ -- $22,129 ($14,676) $390,583
====== === ======== ===== ======== ======== ========
Balances at December 31, 1997 79,998 $80 $397,925 $ -- ($9,343) ($17,147) $371,515
Common stock issued under stock
option and stock purchase plans 877 1 7,932 -- -- -- 7,933
Acquisition of treasury stock (50) -- -- (431) -- -- (431)
------ -- ------- ---- ------ ------- -------
Subtotal 80,825 81 405,857 (431) (9,343) (17,147) 379,017
------ -- ------- ---- ------ ------- -------
Net loss -- -- -- -- (80,744) -- (80,744)
Foreign currency translation
adjustment -- -- -- -- -- (1,997) (1,997)
------ -- ------- ---- ------ ------- -------
Comprehensive loss -- -- -- -- (80,744) (1,997) (82,741)
------ -- ------- ---- ------ ------- -------
Balances at June 30, 1998 80,825 $81 $405,857 ($431) ($90,087) ($19,144) $296,276
====== === ======== ===== ======== ======== ========
</TABLE>
See accompanying notes.
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<PAGE> 6
SYBASE, INC.
------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------
(In thousands) 1998 1997
--------- ---------
<S> <C> <C>
Cash and cash equivalents, beginning of year $ 188,876 $ 156,796
Cash Flows from Operating Activities:
Net loss ($ 80,744) ($ 23,952)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 56,255 52,984
Write off of assets in restructuring 23,126 --
Deferred income taxes (207) --
Changes in assets and liabilities:
Accounts receivable 21,773 27,015
Other current assets (277) (5,574)
Accounts payable (9,696) (5,514)
Accrued compensation and related expenses 3,554 (6,412)
Accrued income taxes (2,976) (11,248)
Other accrued liabilities (4,183) (4,739)
Deferred revenues (1,940) (655)
Other 119 1,108
--------- ---------
Net cash provided by operating activities 4,804 23,013
Cash Flows Used For Investing Activities:
Restricted cash deposits (13,276) --
Purchases of available-for-sale cash investments (20,137) (16,517)
Maturities of available-for-sale cash investments 18,730 11,054
Sales of available-for-sale cash investments 25,131 8,200
Business combinations, net of cash acquired (5,000) (3,097)
Purchases of property, equipment and improvements (13,721) (23,125)
Sale of property, equipment and improvements 6,808 --
Capitalized software development costs (7,963) (9,674)
Decrease (increase) in other assets 1,225 (151)
--------- ---------
Net cash used for investing activities (8,203) (33,310)
Cash Flows (Used For)/Provided By Financing
Activities:
(Decrease) increase in other current liabilities (21,545) 31,704
Acquisition of treasury stock (431) --
Net proceeds from issuance of common stock 7,933 11,892
--------- ---------
Net cash (used for)/provided by financing activities (14,043) 43,596
Effect of exchange rate changes on cash (6,734) (6,424)
--------- ---------
Net (decrease) increase in cash and cash equivalents (24,176) 26,875
Cash and cash equivalents, end of period 164,700 183,671
Cash investments, end of period 33,537 15,011
--------- ---------
Total cash, cash equivalents, and cash investments,
end of period $ 198,237 $ 198,682
========= =========
Supplemental disclosures:
Interest paid $ 537 $ 419
========= =========
Income taxes paid $ 8,593 $ 5,554
========= =========
</TABLE>
See accompanying notes.
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<PAGE> 7
SYBASE, INC.
------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. 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, stockholders'
equity and cash flows as of and for the dates and periods stated. The condensed
consolidated balance sheet as of December 31, 1997 has been prepared from the
audited consolidated financial statements of the Company.
2. This report on Form 10-Q should be read in conjunction with the Company's
audited consolidated financial statements for the year ended December 31, 1997.
The results of operations for the three and six months ended June 30, 1998 are
not necessarily indicative of results for the entire fiscal year ending December
31, 1998.
3. On February 2, 1998, Sybase acquired Intellidex Systems, L.L.C., (Intellidex)
a provider of 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 goodwill. In addition, pursuant
to the terms of the agreement, Sybase is obligated to make contingent payments
based on certain agreed upon performance criteria. The maximum additional amount
payable over an aggregate three-year period is equal to $10,000,000. The
transaction was accounted for as a purchase. The results of operations of
Intellidex are not material in relation to those of the Company and are included
in the consolidated results of operations for periods subsequent to the
acquisition date.
4. In February 1998, the Company announced and began to implement a
restructuring plan aimed at reducing costs and focusing the Company's products
and personnel around its core businesses. The Company's restructuring actions in
the first quarter of 1998 consisted primarily of terminating certain product
lines, terminating employees and vacating certain facilities, and canceling real
estate leases as a result of these employee terminations. These actions resulted
in a charge to operations in the first quarter of 1998 of approximately
$51,600,000, including approximately $12,000,000 for employee severance and
related items, $15,500,000 for vacating facilities, canceling real estate
leases, and writing off related assets, $8,600,000 for expenses related to
discontinued products including the write-off of capitalized software, and
$15,500,000 for other restructuring related items. Of the $51,600,000
restructuring charge, $10,200,000 was paid in the first quarter of 1998 and
$5,700,000 was paid in the second quarter of 1998, $12,600,000 was included in
other accrued liabilities at June 30, 1998 and $23,100,000 consisted of
write-offs of property, equipment and improvements, capitalized software
development costs, and other assets. The Company expects that the majority of
the remaining $12,600,000 accrued liability balance at June 30, 1998 will be
expended in 1998. On February 26, 1998, the Company terminated approximately 600
employees as part of the restructuring. The Company estimates it
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<PAGE> 8
SYBASE, INC.
------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
will incur an additional $18,400,000 in restructuring charges for the remainder
of 1998, bringing the total amount for 1998 to approximately $70,000,000.
5. Basic net income (loss) per share is calculated using the weighted average
number of shares outstanding during the period. Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding plus the dilutive effect of outstanding stock options using the
"treasury stock" method. The following table shows the computation of basic and
diluted earnings per share.
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
6/30/98 6/30/97 6/30/98 6/30/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Basic and diluted net income (loss)
available to common stockholders $ 450 ($17,792) ($80,744) ($23,952)
Shares used in computing basic net
income (loss) per share 80,833 78,659 80,552 78,030
Effect of dilutive securities - stock options 21 --(a) --(a) --(a)
-------- -------- -------- --------
Shares used in computing diluted
net income (loss) per share 80,854 78,659 80,552 78,030
Basic net income (loss) per share $ 0.01 ($ 0.23) ($ 1.00) ($ 0.31)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.01 ($ 0.23) ($ 1.00) ($ 0.31)
======== ======== ======== ========
</TABLE>
(a) The effect of outstanding stock options is excluded from the calculation of
diluted net loss per share as their inclusion would be antidilutive.
6. On February 18, 1998, the Board of Directors authorized the repurchase of up
to $25 million of the Company's outstanding common stock. Subject to price and
market conditions, such purchases may be made from time to time in open market
transactions using available cash balances. The Company had repurchased 50,000
shares of common stock for $431,000 under the program as of June 30, 1998.
7. Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," which states that all items that are required to be
recognized under accounting standards as components of comprehensive income
(revenues, expenses, gains and losses) be reported in a financial statement that
is displayed with the same prominence as other financial statements. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.
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<PAGE> 9
SYBASE, INC.
------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the six months ended June 30, 1998 and 1997, the Company's
comprehensive losses amounted to $82,741,000 and $30,117,000, respectively.
8. Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants Statement of Position No. 97-2, "Software Revenue
Recognition" (SOP 97-2), which supercedes SOP 91-1. SOP 97-2 addresses software
revenue recognition matters primarily from a conceptual level and detailed
implementation guidelines have not been issued.
In March 1998, the American Institute of Certified Public Accountants 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.
9. In 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
(Statement 131) which establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. In
addition, it establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company will comply with the
requirements of Statement 131 in its annual consolidated financial statements
for the year ending December 31, 1998.
10. In June 1998, the Board of Directors approved a stock option repricing
program pursuant to which employees of the Company could elect to exchange or
amend their then outstanding employee stock options for new employee stock
options having an exercise price of $6.875 per share (equal to the fair market
value at July 2, 1998), with exercisability generally prohibited until April 5,
1999, except in the event of a change in control or involuntary termination
other than for cause. A total of 12,442,757 options with exercise prices ranging
from $45.69 to $8.00 per share were exchanged or amended under the program.
11. In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
(Statement 133). The Company is required to adopt this statement for the year
ending December 31, 2000. Statement 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company is not able to
currently determine the effect, if any, that adoption will have on its financial
position, results of operations or cash flows.
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<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/98 6/30/97 Change 6/30/98 6/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
License fees $ 105.9 $ 110.6 -4% $ 201.9 $ 238.0 -15%
Percentage of total revenues 49% 51% 48% 53%
Services $ 112.0 $ 104.9 7% $ 222.8 $ 209.7 6%
Percentage of total revenues 51% 49% 52% 47%
Total revenues $ 217.9 $ 215.5 1% $ 424.7 $ 447.7 -5%
</TABLE>
Total revenues for the three months ended June 30, 1998 increased 1 percent to
$217.9 million compared to $215.5 million achieved in the same period of 1997.
For the six months ended June 30, 1998, total revenues decreased 5 percent to
$424.7 million, down from $447.7 million in the same period of 1997.
License fees revenues were $105.9 million and $201.9 million for the three and
six months ended June 30, 1998, respectively, and $110.6 million and $238.0
million, respectively, for the same periods of 1997. The changes represent 4
percent and 15 percent decreases for the three and six month periods of 1998,
respectively, compared to the comparable 1997 periods. The Company believes the
decreases in license fees revenues were primarily due to slower sales in North
America and Asia and the impact of companies continuing to reallocate technology
resources toward "Year 2000" compliance solutions. Additionally, as a result of
ongoing uncertain economic conditions in the Asia Pacific region, the Company
continues its conservative approach to business and accounting practices in the
region.
Services revenues were $112.0 million and $222.8 million for the three and six
months ended June 30, 1998, respectively, and were $104.9 million and $209.7
million for the respective periods of 1997. The changes represent 7 percent and
6 percent increases for the three months and six months, respectively.
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 51 percent and 52 percent for the
three months and six months ended June 30, 1998, respectively, as compared to 49
percent and 47 percent for the respective periods of 1997.
The increase in services revenues in absolute dollars resulted, in part, from
the increase in support and maintenance service fees related to the Company's
growing installed base, both in terms of
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<PAGE> 11
directly supported sites as well as additional users and the renewal of
maintenance contracts. The increase in services revenues also resulted from
increased demand for the Company's consulting and other services.
GEOGRAPHICAL REVENUES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/98 6/30/97 Change 6/30/98 6/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
North American $125.8 $137.2 -8% $246.9 $286.8 -14%
Percentage of total revenues 58% 64% 58% 64%
International
European $64.1 $55.5 15% $127.0 $110.8 15%
Percentage of total revenues 29% 26% 30% 25%
Intercontinental $28.0 $22.8 23% $50.8 $50.1 1%
Percentage of total revenues 13% 10% 12% 11%
Total International $92.1 $78.3 18% $177.8 $160.9 10%
Percentage of total revenues 42% 36% 42% 36%
Total revenues $217.9 $215.5 1% $424.7 $447.7 -5%
</TABLE>
North American revenues (United States, Canada and Mexico) decreased 8 percent
and 14 percent during the three months and six months ended June 30, 1998,
respectively, to $125.8 million and $246.9 million from $137.2 million and
$286.8 million for the same periods of 1997. These decreases were primarily due
to lower license fees revenues in North America. International revenues
increased 18 percent and 10 percent for the three months and six months ended
June 30, 1998, respectively, to $92.1 million and $177.8 million from $78.3
million and $160.9 million, respectively, for both comparable periods of 1997.
European revenues were up 15 percent for both the three months and six months
ended June 30, 1998 compared to the same periods of 1997. The performance in
Europe reflects both increased license fees revenues and services revenues.
Intercontinental revenues (Japan, Asia Pacific and South America) increased 23
percent and 1 percent for the three months and six months ended June 30, 1998,
respectively, compared to the same periods of 1997. The increase in
Intercontinental revenues is primarily due to higher services revenues in Asia
Pacific and South America. Moreover, the size of the increase for the three
months ended June 30, 1998 is largely due to particularly weak revenues in Japan
in the comparable three month period of 1997.
International revenues were 42 percent of total revenues in both the three
months and six months ended June 30, 1998 compared to 36 percent in both
comparable periods of 1997.
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
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<PAGE> 12
rates, the strength of local economies, and the general volatility of software
markets may result in a higher or lower proportion of foreign revenues as a
percentage of total revenues in the future.
COSTS AND EXPENSES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/98 6/30/97 Change 6/30/98 6/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Cost of license fees $8.9 $6.1 46% $19.0 $14.2 34%
Percentage of license fees revenues 8% 6% 9% 6%
Cost of services $56.1 $61.7 -9% $118.8 $123.6 -4%
Percentage of services revenues 50% 59% 53% 59%
Sales and marketing $103.4 $116.7 -11% $211.8 $231.3 -8%
Percentage of total revenues 47% 54% 50% 52%
Product development and
Engineering $33.3 $33.7 -1% $70.4 $69.0 2%
Percentage of total revenues 15% 16% 16% 15%
General and administrative $14.6 $14.4 1% $31.0 $31.8 -2%
Percentage of total revenues 7% 7% 7% 7%
</TABLE>
Cost of License Fees. Cost of license fees, consisting primarily of product
costs (media and documentation), amortization of capitalized software
development costs and third-party royalty costs, were $8.9 million and $19.0
million for the three months and six months ended June 30, 1998, respectively,
compared to $6.1 million and $14.2 million for both comparable periods of 1997.
These costs were 8 percent and 9 percent of license fees revenues for the three
months and six months ended June 30, 1998, respectively, compared to 6 percent
for both comparable periods of 1997. Amortization of capitalized software costs
included in cost of license fees was $4.9 million and $9.8 million for the three
months and six months ended June 30, 1998, respectively, compared to $2.2
million and $4.2 million for the comparable periods of 1997, and represented the
largest factor in the increase in the cost of license fees. The increase in the
amortization of capitalized software relates to the release of Adaptive
Server(TM) Enterprise 11.5, PowerBuilder(R) 6.0 and PowerStudio(TM) during the
second half of 1997, and the release of Adaptive Server(TM) Enterprise 11.9,
featuring row-level locking, in the second quarter of 1998.
Cost of Services. Cost of services, consisting primarily of maintenance,
consulting and education expenses and, to a lesser degree, services-related
product costs (media and documentation), were $56.1 million and $118.8 million
for the three months and six months
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<PAGE> 13
ended June 30, 1998, respectively, compared to $61.7 million and $123.6 million
for both comparable periods of 1997. These changes represent decreases of 9
percent and 4 percent for the three months and six months ended June 30, 1998
compared to the same periods of 1997. These costs decreased as a percentage of
services revenues to 50 percent and 53 percent for the three months and six
months ended June 30, 1998, respectively, from 59 percent for both comparable
periods of 1997. The decrease in cost of services as a percentage of services
revenues for both periods is primarily due to the restructuring efforts
initiated in the first quarter of 1998 and improved productivity in its services
organization.
Sales and Marketing. Sales and marketing expenses were $103.4 million and $211.8
million for the three months and six months ended June 30, 1998, respectively,
compared to $116.7 million and $231.3 million for both of the comparable periods
of 1997. These changes represent decreases of 11 percent and 8 percent for the
three months and six months ended June 30, 1998 compared to the same periods of
1997. These costs decreased as a percentage of total revenues to 47 percent and
50 percent for the three months and six months ended June 30, 1998, respectively
compared to 54 percent and 52 percent for the same periods of 1997. This
decrease in sales and marketing expense in absolute dollars is primarily due to
the Company's aggressive restructuring and cost containment program implemented
in the first quarter of 1998.
Product Development and Engineering. Product development and engineering
expenses (net of capitalized software development costs) were $33.3 million and
$70.4 million for the three months and six months ended June 30, 1998,
respectively, compared to $33.7 million and $69.0 million for the same periods
of 1997. These costs as a percentage of total revenues slightly decreased to 15
percent from 16 percent for the three months ended June 30, 1998 compared to the
same period of 1997 and an increase to 16 percent from 15 percent for the six
months ended June 30, 1998 compared to the same period of 1997. The increase in
absolute dollars for the six months ended June 30, 1998 compared to the same
period of 1997 is in part due to the acquisition in February 1998 of Intellidex
Systems, L.L.C. (Intellidex), a provider of data management technology for
deploying and managing data warehouse environments. The product development and
engineering costs incurred by Intellidex since the date of acquisition have been
included in the results of operations for the first quarter of 1998. The Company
capitalized approximately $4.1 million and $7.6 million of software development
costs in the second quarter and first half of 1998, respectively, compared to
$5.6 million and $9.7 million for the same periods of 1997. The capitalization
of software development costs represents 12% and 11% of gross product
development and engineering expenditures for the second quarter and first half
of 1998, respectively. By comparison, capitalization of software development
costs for the same periods of 1997 represented 14% and 12% of such expenditures,
respectively. This capitalization of product development costs in the first half
of 1998 primarily reflects development programs for Adaptive Server(TM)
Enterprise 11.9, enhancements to Replication Server(R) and Powersoft(R) Jaguar
CTS products. In the first quarter of 1998, the Company also recorded
capitalized software costs of $3.7 million in connection with its Intellidex
acquisition. (See Note 3 of the Notes to Condensed Consolidated Financial
Statements.) 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 represented 7
percent of total revenues for the three months and six months ended June 30,
1998 and 1997, respectively, and remained relatively flat in absolute dollars
with $14.6 million and $31.0 million for the three months and six months ended
June 30, 1998, respectively, compared to $14.4 million and $31.8 million for the
same periods in 1997. The Company plans to continue tightly managing general and
administrative expenses and to limit infrastructure growth in the near term.
-13-
<PAGE> 14
Cost of Restructuring. In February 1998, the Company announced and began to
implement a restructuring plan aimed at reducing costs and focusing the
Company's products and personnel around its core businesses. The Company's
restructuring actions in the first quarter of 1998, consisted primarily of
terminating certain product lines, terminating employees and vacating certain
facilities, and canceling real estate leases as a result of these employee
terminations. These actions resulted in a charge to operations in the first
quarter of 1998 of approximately $51.6 million, including approximately $12.0
million for employee severance and related items, $15.5 million for vacating
facilities, canceling real estate leases, and writing off related assets, $8.6
million for expenses related to discontinued products including the write-off of
capitalized software, and $15.5 million for other restructuring related items.
Of the $51.6 million restructuring charge, $10.2 million was paid in the first
quarter of 1998 and $5.7 million was paid in the second quarter of 1998, $12.6
million was included in other accrued liabilities at June 30, 1998 and $23.1
million consisted of write-offs of property, equipment and improvements,
capitalized software development costs, and other assets. The Company expects
that the majority of the remaining $12.6 million accrued liability balance at
June 30, 1998 will be expended in 1998. On February 26, 1998, the Company
terminated approximately 600 employees as part of the restructuring. The Company
estimates it will incur an additional $18.4 million in restructuring charges for
the remainder of 1998, bringing the total amount for 1998 to approximately $70.0
million.
OPERATING INCOME (LOSS)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/98 6/30/97 Change 6/30/98 6/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Operating income (loss) $1.6 ($17.2) -109% ($78.1) ($22.2) 252%
Percentage of total revenues 1% -8% -18% -5%
Operating income (loss) exclusive of $1.6 ($17.2) -109% ($26.5) ($22.2) 19%
restructuring
Percentage of total revenues 1% -8% -6% -5%
</TABLE>
Operating income was $1.6 million for the three months ended June 30, 1998
compared to an operating loss of $17.2 million for the same period of 1997. This
increase in operating income is due primarily to the cost containment efforts
implemented in the first quarter of 1998. Operating loss, exclusive of cost of
restructuring, was $26.5 million for the six months ended June 30, 1998 compared
to an operating loss of $22.2 million for the same period of 1997. This increase
in operating loss before cost of restructuring is due primarily to lower license
fees revenues and a conservative approach to business practices in the Asia
Pacific region. The operating loss of $78.1 million for the six months ended
June 30, 1998 includes restructuring charges of $51.6 million related to the
Company's plan to discontinue certain product lines, terminate employees and
vacate certain real estate facilities.
-14-
<PAGE> 15
OTHER INCOME AND EXPENSE, NET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/98 6/30/97 Change 6/30/98 6/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income $2.0 $2.2 -10% $4.7 $4.1 15%
Percentage of total revenues 1% 1% 1% 1%
Interest expense and other, net $0.3 ($0.5) ($0.3) ($1.4)
Percentage of total revenues * * * *
</TABLE>
- ---------------
* 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 the related hedging activities and
the cost of hedging foreign currency exposures. The slight decrease in interest
income in absolute dollars for the three months ended June 30, 1998 compared to
the same period of 1997 is due to lower average invested cash balances in the
three months ended June 30, 1998. The increase in interest income for the six
months ended June 30, 1998 compared to the same period of 1997 is due primarily
to larger average invested cash balances over the first six months of 1998. The
decrease in interest expense and other (net) in absolute dollars for the three
months and six months ended June 30, 1998 compared to both comparable periods of
1997 is primarily due to lower net cost of hedging activities.
PROVISION FOR INCOME TAXES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/98 6/30/97 Change 6/30/98 6/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $3.5 $2.4 46% $7.0 $4.5 56%
</TABLE>
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and income tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
The Company recorded income tax provisions of $3.5 million and $7.0 million for
the three months and six months ended June 30, 1998, respectively, compared to
income tax provisions of $2.4 million and $4.5 million for the same periods of
1997. 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.
-15-
<PAGE> 16
Realization of the Company's deferred tax assets, which totaled $41.3 million at
June 30, 1998, 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 an impact on the Company's tax provision in future
periods. See "Future Operating Results."
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/98 6/30/97 Change 6/30/98 6/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $0.4 ($17.8) -102% ($80.7) ($24.0) 236%
Percentage of total revenues 0% -8% -19% -5%
Basic and diluted net income (loss) $0.01 ($0.23) -104% ($1.00) ($0.31) 222%
per share
Shares used in computing basic net 80.8 78.7 3% 80.6 78.0 3%
income (loss) per share
Shares used in computing diluted net 80.9 78.7 3% 80.6 78.0 3%
income (loss) per share*
</TABLE>
* The effect of outstanding stock options is excluded from the calculation of
diluted net loss per share as their inclusion would be antidilutive.
The Company incurred a net income of $0.4 million and a net loss of $80.7
million for the three months and six months ended June 30, 1998, respectively,
compared to a net loss of $17.8 million and $24.0 million for both comparable
periods of 1997. The increase in net income for the three months ended June 30,
1998 compared to the same period of 1997 is primarily attributed to cost
containment efforts implemented in the first quarter of 1998. The increase in
net loss for the six months ended June 30, 1998 compared to the same period of
1997 is primarily due to restructuring charges and lower license fees revenues.
The basic and diluted net income (loss) per share was $0.01 for the three months
ended June 30, 1998 compared to a net loss per share of $0.23 for the same
period of 1997. The basic and diluted net loss per share was $1.00 for the six
months ended June 30, 1998 compared to a net loss per share of $0.31 for the
same period of 1997. Shares used in computing basic and diluted net income
(loss) per share increased 3 percent year over year, primarily due to the
exercise of employee stock options and the increase of shares outstanding under
the employee stock purchase plan.
-16-
<PAGE> 17
FINANCIAL CONDITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended Percent
6/30/98 6/30/97 Change
---------- ---------- -------
<S> <C> <C> <C>
Working capital $26.0 $90.5 -71%
Cash, cash equivalents and short-term cash investments $192.2 $198.7 -3%
Net cash provided by operating activities $4.8 $23.0 -79%
Net cash used for investing activities ($8.2) ($33.3) -75%
Net cash (used for) / provided by financing ($14.0) $43.6 -132%
activities
</TABLE>
Net cash provided by operating activities was $4.8 million for the six months
ended June 30, 1998 compared to net cash provided by operating activities of
$23.0 million for the same period of 1997. Net cash provided by operating
activities during the six months ended June 30, 1998 reflects a net loss of
$80.7 million compared to a net loss of $24.0 million for the same period of
1997. Depreciation and amortization, which are included in the net losses, but
do not require the use of cash, amounted to $56.3 million for the six months
ended June 30, 1998 compared to $52.9 million in 1997. This increase in
depreciation and amortization reflects the increase in amortization of
capitalized software development costs. In addition, in the six months ended
June 30, 1998, the Company incurred a non-cash charge to operations in the
amount of $23.1 million in connection with the cost of restructuring implemented
in the first quarter of 1998.
Net cash used for investing activities decreased to $8.2 million for the six
months ended June 30, 1998 compared to $33.3 million in the same period for
1997. Investing activities included capital expenditures of $13.8 million for
the six months ended June 30, 1998 compared to $23.1 million in the same period
for 1997. This reflects a decrease in capital expenditures required to support
the Company's lower employee base around the world as well as related systems
and infrastructure needs. The Company's headcount was reduced to 4,773 at June
30, 1998 from 5,618 at June 30, 1997. Additionally, for the six months ended
June 30, 1998, investing activities included $6.8 million of cash provided by
the sale of real estate facilities. In the first quarter of 1998, the Company
collateralized its obligation to a lessor by pledging $13.3 million in cash
deposits. Net cash provided by the sale, maturity and purchase of cash
investments was $23.7 million for the six months ended June 30, 1998 compared to
$2.7 million for the same period of 1997.
Net cash used for financing activities for the six months ended June 30, 1998
was $14.0 million compared to net cash provided by financing activities of $43.6
million in the same period for 1997. Net cash used for financing activities for
the six months ended June 30, 1998 increased due to the repayment by the Company
of amounts received from Japanese financial institutions for financing
transactions related to revenues which were subsequently reversed as a result of
certain accounting practices in the Japanese subsidiary discovered in January
1998 that were not in accordance with U.S. generally accepted accounting
principles. This activity was partially offset
-17-
<PAGE> 18
by cash proceeds from the issuance of common stock associated with the exercise
of stock options.
The Company engages in business operations around the world and is therefore
exposed to foreign currency fluctuations. As of June 30, 1998, the Company had
identifiable assets totaling $148.9 million associated with its European
operations and $85.8 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
Note 2 of Notes to Consolidated Financial Statements in the 1997 Sybase Annual
Report to Stockholders). 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 foreign translation adjustments account in stockholders' equity.
Cash, cash equivalents and cash investments totaled $198.2 million at June 30,
1998, compared to $198.7 million at June 30, 1997.
The Company believes that it has the financial resources needed to meet its
presently anticipated business requirements, including capital expenditures and
strategic operating programs, for the foreseeable future.
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
risks, including but not limited to the specific risks identified below. The
results of operations for the six months ended June 30, 1998 and year ended
December 31, 1997 are not necessarily indicative of results for fiscal year
ending December 31, 1998 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 license fees revenues 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 experienced a seasonal
pattern of license fees 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. As a result of both the
seasonal impact on revenues and lower license fees revenues, a restructuring
charge of $51.6 million and a more conservative approach to business practices
in the Asia Pacific Region because of the uncertain economic conditions, the
Company incurred both a net operating loss and a net loss for the six months
ended June 30, 1998. The Company anticipates it will incur further restructuring
-18-
<PAGE> 19
charges of approximately $18.4 million for the remaining quarters of 1998, which
may cause the Company to incur operating losses and net losses in future
periods. The Company has operated historically with little or no backlog and, as
a result, license fees 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 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 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 1991 through 1994 or the rates of
growth projected for the software markets in which Sybase competes.
In 1998, the Company expects to make further changes to its sales coverage model
and sales compensation programs, and focus increasingly on services-led selling
and on providing integrated solutions. Although such changes are intended to
enhance overall revenues, such changes could, in the short-run, materially and
adversely affect the sales process and revenues. In February 1998, the Company
appointed Michael S. Gardner as Senior Vice President of Worldwide Sales. In
April 1998, Mr. Gardner assumed responsibility for overseeing the Company's
worldwide sales force from Mike Forster, Senior Vice President of Worldwide
Field Operations, who will retire at the end of 1998. In the third quarter of
1997, John Chen became the Company's President and Chief Operating Officer, and
Mitchell Kertzman, Chief Executive Officer, became Chairman of the Board. In
February 1998, the Company created the Office of the Chief Executive with shared
leadership responsibilities between Messrs. Kertzman and Chen. Mr. Chen now also
holds the title of Chief Executive Officer. The Company may 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 productivity, expenses and revenues.
The market for the Company's stock is highly volatile. The trading price of the
Company's common stock fluctuated widely in 1995, 1996, 1997 and the first half
of 1998 and may in the future continue to be subject to wide fluctuations 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
-19-
<PAGE> 20
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 and which 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. Several of the Company's
international subsidiaries have been only recently acquired or formed. For
example, the Company recently acquired operations in Chile, Argentina, Norway
and Peru and established a new subsidiary in Venezuela. In addition there have
been several management and organizational changes within the international
operations. For example, in 1998, the country managers in Australia,
Switzerland, Thailand and Japan 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
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, political instability in emerging
markets, and difficulties in staffing and managing foreign operations, as well
as by 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 in the fourth quarter of 1997 and the first half
of 1998.
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
applications or operating systems, that the Company does not 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 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 will depend in part on its ability to enhance
existing products and to introduce new products on a timely and cost-effective
basis that meet dynamic customer requirements. 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
-20-
<PAGE> 21
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.
During the first half of 1998, the Company achieved a number of milestones,
including the shipment to several application partners of Adaptive Server(TM)
Enterprise with row-level locking capabilities. The Company also announced the
development and anticipated availability dates of several products, including a
beta version of Adaptive Server(TM) Anywhere for Windows CE and for its
Warehouse Studio(TM) product bundle for data warehousing.
Sybase's results 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 will not be interoperable with Sybase RDBMSs until
certain features are added to the Company's RDBMS, 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.
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
1997 fiscal year or future periods, by the 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
-21-
<PAGE> 22
personnel is intense in the software industry and, Sybase believes, has
increased substantially in recent years. There were several changes in 1997 and
early 1998 to the Company's executive management team. For example, in the third
quarter of 1997, John Chen became the Company's President and Chief Operating
Officer, and Mitchell Kertzman, Chief Executive Officer, became Chairman of the
Board. In February 1998, the Company created the Office of the Chief Executive
with shared leadership responsibilities between Messrs. Kertzman and Chen. Mr.
Chen now also holds the title of Chief Executive Officer. Other management
changes and additions were also effected in late 1997 and early 1998, including
the appointment of several new Senior Vice Presidents in charge of several major
business units. Further changes in management, the Company's recent financial
performance, and a reduction in the overall number of Sybase employees made in
February 1998 could cause an increase in the amount of employee turnover. The
failure to effectively recruit, train, and retain qualified personnel or high
rates of employee turnover, particularly among engineering or sales staff, could
adversely affect the Company's product development efforts, product sales, and
other aspects of the Company's operations and results.
Sybase currently ships most of its products in North America (other than its
Powersoft(R) products) from its Emeryville, California distribution facility.
Because of the pattern of recording a high percentage of quarterly revenues
within the last week or two weeks of the quarter, the closure or inoperability
of this facility 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.
The Company has acquired a number of companies in the past. Most recently, in
February 1998, the Company acquired Intellidex Systems L.L.C., a provider of
meta data management technology for deploying and managing data warehouse
environments. 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 the first quarter of 1998, the Company incurred a restructuring charge of
$51.6 million and announced that it anticipates incurring an additional charge
of approximately $20.0 million in the remaining quarters of 1998 in connection
with a Company-wide reorganization which is intended to reduce Sybase's cost
structure by approximately $100 million on an annualized basis. The actual
amount of such charge could exceed the estimated amount and actual expense
savings in the future could be offset by other expense increases or changes in
the Company's business. However, as these are forward-looking statements, future
actual results may differ based on the factors described above.
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<PAGE> 23
Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants Statement of Position No. 97-2, "Software Revenue
Recognition" (SOP 97-2), which supercedes SOP 91-1. Restatement of prior
financial statements is prohibited. SOP 97-2 addresses software revenue
recognition matters primarily from a conceptual level and detailed
implementation guidelines have not been issued. In March 1998, the American
Institute of Certified Public Accountants 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. 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 all express and implied
warranties against such defects. Such legal claims could have a materially
adverse impact on the Company's business and results of operations.
The Company has completed an initial assessment of its worldwide infrastructure
systems (e.g., computer and telephone systems) and its business systems (e.g.,
revenue, sales and marketing and finance functions) to determine what actions
are required to resolve the Year 2000 issue. As of February 1998, approximately
two-thirds of the Company's systems had been tested or certified to be Year 2000
compatible. Of the remaining one-third, approximately half are scheduled for
upgrades from suppliers, which will be installed over the coming year. The
Company anticipates completion of testing on the remaining systems in the third
quarter of 1998. For systems which are not either vendor-certified or internally
certified to be Year 2000 compatible, the Company will endeavor to upgrade or
modify those systems where possible, and otherwise retire systems where
necessary. The Company believes it will have identified solutions available for
all of its systems before the end of 1998, and expects to install all solutions
by April of 1999. The Company has initiated formal communications with all of
its significant suppliers and large customers to determine the extent to which
the Company's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 issues. There is no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and that they would not have an adverse effect on the Company's systems. The
Company does
-23-
<PAGE> 24
not believe that the cost of such actions will have a material
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
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, the ability to locate
and correct all relevant computer codes and other uncertainties.
-24-
<PAGE> 25
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Registrant was held on May 27, 1998.
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 three Class III directors, each to serve a three-year term
expiring upon the 2001 Annual Meeting of Stockholders or until a successor
is duly elected and qualified. L. William Krause, Robert P. Wayman and
Jeffrey T. Webber were the only nominees and each was elected (71,497,314
votes were cast for election of Mr. Krause and 2,106,368 were cast
withholding authority to vote for his election; 71,518,641 votes were cast
for election of Mr. Wayman and 71,520,557 were cast withholding authority
to vote for his election; 71,520,557 votes were cast for election of Mr.
Webber and 2,083,125 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 (Richard Alberding, John Chen,
Robert Epstein, Mitchell Kertzman and Alan Salisbury) had terms that
continued after the 1998 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 2,500,000
shares (62,172,404 for, 11,061,450 votes against, 369,828 abstentions, and
no 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 1,500,000 shares (70,324,931 for,
2,881,970 against, 396,781 abstentions, and no non-votes.)
4. Ratification of the appointment of Ernst & Young, LLP as independent
auditors for the Company for the year ending December 31, 1998 (72,899,301
for, 496,144 against, 208,237 abstentions, and no non-votes.)
5. Approval of a stockholder proposal to recommend that the Board of Directors
be reorganized into a single class (30,223,247 for, 13,958,524 votes
against, 571,371 abstentions, and 28,850,540 non-votes.)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
-25-
<PAGE> 26
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 7, 1998 SYBASE, INC.
By /s/ JACK L. ACOSTA
---------------------------------
Jack L. Acosta
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
-26-
<PAGE> 27
EXHIBIT INDEX TO SYBASE, INC.
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED FINANCIAL STATEMENTS OF SYBASE INC. AS OF JUNE 30, 1998 AND FOR THE
YEARS THEN ENDED.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 164,700
<SECURITIES> 33,537
<RECEIVABLES> 215,996
<ALLOWANCES> 35,087
<INVENTORY> 0
<CURRENT-ASSETS> 408,639
<PP&E> 360,813
<DEPRECIATION> (239,234)
<TOTAL-ASSETS> 680,601
<CURRENT-LIABILITIES> 382,608
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 405,857
<TOTAL-LIABILITY-AND-EQUITY> 680,601
<SALES> 201,924
<TOTAL-REVENUES> 424,687
<CGS> 19,032
<TOTAL-COSTS> 349,724
<OTHER-EXPENSES> 153,100
<LOSS-PROVISION> 1,150
<INTEREST-EXPENSE> 537
<INCOME-PRETAX> (73,724)
<INCOME-TAX> 7,020
<INCOME-CONTINUING> (80,744)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (80,744)
<EPS-PRIMARY> (1.00)<F1>
<EPS-DILUTED> (1.00)
<FN>
<F1>REFLECTS BASIC EPS ACCORDING TO SFAS 128, EARNINGS PER SHARE
</FN>
</TABLE>
