<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 September 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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
6475 Christie Avenue, Emeryville, CA 94608
------------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (510) 922-3500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On September 30, 1998, 81,718,742 shares of the Registrant's Common Stock, $.001
par value, were outstanding.
<PAGE> 2
SYBASE, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 1998 3
and December 31, 1997
Condensed Consolidated Statements of Operations for the three months and 4
the nine months ended September 30, 1998 and September 30, 1997
Condensed Statements of Stockholders' Equity for the nine months ended 5
September 30, 1998 and September 30, 1997
Condensed Consolidated Statements of Cash Flows 6
for the nine months ended September 30, 1998 and
September 30, 1997
Notes to Condensed Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 26
Signature 27
Exhibit Index 28
</TABLE>
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<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except share data) 1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 204,725 $ 188,876
Short-term cash investments 14,801 47,127
--------- ---------
Total cash, cash equivalents and short-term cash investments 219,526 236,003
Accounts receivable, net 167,967 204,411
Deferred income taxes 16,888 16,973
Other current assets 17,875 18,274
--------- ---------
Total current assets 422,256 475,661
Long-term cash investments 989 10,134
Property, equipment and improvements, net 111,436 149,661
Deferred income taxes 24,077 24,077
Capitalized software, net 38,288 44,208
Other assets 64,359 77,884
--------- ---------
Total assets $ 661,405 $ 781,625
========= =========
Current liabilities:
Accounts payable $ 11,667 $ 19,521
Accrued compensation and related expenses 45,752 43,974
Accrued income taxes 27,274 31,800
Other accrued liabilities 93,258 95,476
Deferred revenue 162,097 170,473
Other current liabilities 12,184 46,907
--------- ---------
Total current liabilities 352,232 408,151
Other liabilities 1,655 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; 81,718,742 shares issued
and outstanding (1997-79,998,287) 82 80
Additional paid-in capital 410,964 397,925
Accumulated deficit (87,881) (9,343)
Accumulated translation adjustments (15,216) (17,147)
Treasury stock; 50,000 shares of common stock (431) --
--------- ---------
Total stockholders' equity 307,518 371,515
--------- ---------
Total liabilities and stockholders' equity $ 661,405 $ 781,625
========= =========
</TABLE>
See accompanying notes.
-3-
<PAGE> 4
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(In thousands, except per share data) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 98,759 $ 122,550 $ 300,683 $ 360,533
Services 111,498 110,473 334,261 320,172
--------- --------- --------- ---------
Total revenues 210,257 233,023 634,944 680,705
Costs and expenses:
Cost of license fees 8,921 6,563 27,953 20,769
Cost of services 57,807 63,435 176,654 186,986
Sales and marketing 87,684 118,015 299,529 349,286
Product development and engineering 36,865 33,871 107,258 102,878
General and administrative 15,016 15,410 46,029 47,216
Cost of restructuring -- -- 51,694 --
--------- --------- --------- ---------
Total costs and expenses 206,293 237,294 709,117 707,135
--------- --------- --------- ---------
Operating income (loss) 3,964 (4,271) (74,173) (26,430)
Interest income 2,403 2,398 7,145 6,512
Interest expense and other, net (660) (882) (990) (2,262)
--------- --------- --------- ---------
Income (loss) before income taxes 5,707 (2,755) (68,018) (22,180)
Provision for income taxes 3,500 3,195 10,520 7,723
--------- --------- --------- ---------
Net income (loss) $ 2,207 $ (5,950) $ (78,538) $ (29,903)
========= ========= ========= =========
Basic net income (loss) per share $ 0.03 $ (0.08) $ (0.97) $ (0.38)
========= ========= ========= =========
Shares used in computing basic net income (loss) per share 81,137 79,282 80,744 78,456
========= ========= ========= =========
Diluted net income (loss) per share $ 0.03 $ (0.08) $ (0.97) $ (0.38)
========= ========= ========= =========
Shares used in computing diluted net income (loss) per share 81,936 79,282 80,744 78,456
========= ========= ========= =========
</TABLE>
See accompanying notes.
-4-
<PAGE> 5
SYBASE, INC.
--------------------
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Retained Accumulated
Common Additional Earnings Other Comp-
--------------------- Paid-In Treasury (Accumulated rehensive
(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 2,444 2 24,617 -- -- -- 24,619
--------- --------- --------- --------- --------- --------- ---------
Subtotal 79,803 80 395,777 -- 46,081 (8,511) 433,427
--------- --------- --------- --------- --------- --------- ---------
Net loss -- -- -- -- (29,903) -- (29,903)
Foreign currency translation adjustment -- -- -- -- (5,153) (5,153)
--------- --------- --------- --------- --------- --------- ---------
Comprehensive loss -- -- -- -- (29,903) (5,153) (35,056)
--------- --------- --------- --------- --------- --------- ---------
Balances at September 30, 1997 79,803 $ 80 $ 395,777 $ -- $ 16,178 $ (13,664) $ 398,371
========= ========= ========= ========= ========= ========= =========
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 1,771 2 13,039 -- -- -- 13,041
Acquisition of treasury stock (50) -- -- (431) -- -- (431)
--------- --------- --------- --------- --------- --------- ---------
Subtotal 81,719 82 410,964 (431) (9,343) (17,147) 384,125
--------- --------- --------- --------- --------- --------- ---------
Net loss -- -- -- -- (78,538) -- (78,538)
Foreign currency translation adjustment -- -- -- -- 1,931 1,931
--------- --------- --------- --------- --------- --------- ---------
Comprehensive loss -- -- -- -- (78,538) 1,931 (76,607)
--------- --------- --------- --------- --------- --------- ---------
Balances at September 30, 1998 81,719 $ 82 $ 410,964 $ (431) $ (87,881) $ (15,216) $ 307,518
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
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<PAGE> 6
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended
September 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash and cash equivalents, beginning of year $ 188,876 $ 156,796
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (78,538) (29,903)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 81,712 78,722
Write off of assets in restructuring 23,126 --
Changes in assets and liabilities:
Accounts receivable 27,522 32,443
Other current assets 156 (3,344)
Accounts payable (7,854) (4,843)
Accrued compensation and related expenses 1,778 (5,160)
Accrued income taxes (4,526) (1,083)
Other accrued liabilities (13,331) (7,578)
Deferred revenues (8,376) (4,073)
Other 313 (2,121)
--------- ---------
Net cash provided by operating activities 21,982 53,060
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale cash investments (23,422) (56,893)
Maturities of available-for-sale cash investments 34,755 16,998
Sales of available-for-sale cash investments 30,138 8,200
Business combinations, net of cash acquired (5,000) (3,104)
Purchases of property, equipment and improvements (20,795) (31,123)
Sale of property, equipment and improvements 6,808 --
Capitalized software development costs (8,162) (16,875)
Decrease (increase) in other assets (2,855) (6,436)
--------- ---------
Net cash provided by/(used for) investing activities 11,467 (89,233)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in other current liabilities (27,132) 40,720
Acquisition of treasury stock (431) --
Net proceeds from issuance of common stock 13,041 24,619
--------- ---------
Net cash (used for)/provided by financing activities (14,522) 65,339
Effect of exchange rate changes on cash (3,078) (5,450)
--------- ---------
Net increase in cash and cash equivalents 15,849 23,716
Cash and cash equivalents, end of period 204,725 180,512
Cash investments, end of period 15,790 49,443
--------- ---------
Total cash, cash equivalents, and cash investments,
end of period $ 220,515 $ 229,955
========= =========
Supplemental disclosures:
Interest paid $ 414 $ 799
========= =========
Income taxes paid $ 10,140 $ 10,682
========= =========
</TABLE>
See accompanying notes.
-6-
<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 included in its Annual Report to
Stockholders for the year ended December 31, 1997. The results of operations for
the three and nine months ended September 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 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 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
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, $17,100,000 was paid out as of
September 30, 1998, $11,400,000 was included in other accrued liabilities at
September 30, 1998 and $23,100,000 consisted of write-offs of property,
equipment and improvements, capitalized software development costs, and other
assets. On February 26, 1998, the Company terminated approximately 600 employees
as part of the restructuring. The Company estimates it will incur
-7-
<PAGE> 8
SYBASE, INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
additional restructuring charges in the fourth quarter of 1998. The amount of
these charges is undeterminable at this time.
5. Basic net income (loss) per share is calculated using the weighted average
number of shares outstanding during the period. Diluted net income (loss) 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 net income (loss) per share.
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/98 9/30/97 9/30/98 9/30/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Basic and diluted net income (loss)
available to common stockholders $ 2,207 $ (5,950) $(78,538) $(29,903)
Shares used in computing basic net
income (loss) per share 81,137 79,282 80,744 78,456
Effect of dilutive securities - stock
options 799 --(a) --(a) --(a)
-------- -------- -------- --------
Shares used in computing diluted
net income (loss) per share 81,936 79,282 80,744 78,456
Basic net income (loss) per share $ 0.03 $ (0.08) $ (0.97) $ (0.38)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.03 $ (0.08) $ (0.97) $ (0.38)
======== ======== ======== ========
</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 $25,000,000 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 September 30, 1998.
On October 22, 1998, the Company repurchased an additional 550,000 shares of its
common stock for $2,928,000.
7. Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," (Statement 130) which requires certain revenues,
expenses, gains or losses that, prior to adoption, were reported separately in
stockholders' equity and excluded from net income (loss) to be included in other
comprehensive income (loss). Prior year financial statements have been
reclassified to conform to the requirements of Statement 130. During the nine
months ended
-8-
<PAGE> 9
SYBASE, INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998 and 1997, the Company's comprehensive losses were $76,607,000
and $35,056,000, 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 to acquire common stock at an exercise price equal to the fair market
value at July 2, 1998 ($6.875 per share), with exercisability generally
prohibited until April 5, 1999, except in the event of a change in control or
involuntary termination other than for cause. Options to acquire a total of
12,442,757 shares of common stock at 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.
-9-
<PAGE> 10
SYBASE, INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. In September 1998, the Company terminated a five-year lease for its research
and development facility in Boulder, Colorado by exercising the option to
purchase the property for $13,016,001. As a result, the Company satisfied its
obligation to the lessor resulting in the release of $13,276,000 in cash
deposits. The Company subsequently entered into a sale-leaseback agreement
resulting in an immaterial gain. Under the terms of the leaseback agreement, the
Company entered into a twelve-year operating lease.
Future minimum lease payments under this noncancellable operating lease having
terms in excess of one year as of September 30, 1998 are as follows:
<TABLE>
<S> <C>
1998 $ 420,000
1999 1,680,000
2000 1,680,000
2001 1,806,000
2002 1,848,000
Thereafter 16,977,576
-----------
Total minimum lease payments $24,411,576
===========
</TABLE>
-10-
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<TABLE>
<CAPTION>
REVENUES
(DOLLARS IN MILLIONS)
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/98 9/30/97 Change 9/30/98 9/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
License fees $ 98.8 $122.5 -19% $300.7 $360.5 -17%
Percentage of total revenues 47% 53% 47% 53%
Services $111.5 $110.5 1% $334.3 $320.2 4%
Percentage of total revenues 53% 47% 53% 47%
Total revenues $210.3 $233.0 -10% $635.0 $680.7 -7%
</TABLE>
Total revenues for the three months ended September 30, 1998 decreased 10
percent to $210.3 million compared to $233.0 million achieved in the same period
of 1997. For the nine months ended September 30, 1998, total revenues decreased
7 percent to $635.0 million, down from $680.7 million in the same period of
1997.
License fee revenues were $98.8 million and $300.7 million for the three and
nine months ended September 30, 1998, respectively, and $122.5 million and
$360.5 million, for the same periods of 1997. The changes represent 19 percent
and 17 percent decreases for the three and nine month periods of 1998,
respectively, compared to the comparable 1997 periods. The decreases in license
fee revenues were primarily due to slower sales in North America and Asia. In
addition, the Company believes the impact of companies continuing to reallocate
available technology resources toward "Year 2000" compliance solutions also
contributed to the decline in license fee revenues. 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 $111.5 million and $334.3 million for the three and nine
months ended September 30, 1998, respectively, and were $110.5 million and
$320.2 million for the respective periods of 1997. The changes represent 1
percent and 4 percent increases for the three month and nine month periods,
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 53 percent for both the three month
and nine month periods ended September 30, 1998, respectively, as compared to 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
installed base, both in terms of directly
-11-
<PAGE> 12
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.
<TABLE>
<CAPTION>
GEOGRAPHICAL REVENUES
(DOLLARS IN MILLIONS)
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/98 9/30/97 Change 9/30/98 9/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
North American $ 125.7 $ 143.5 -12% $ 372.6 $ 430.3 -13%
Percentage of total revenues 60% 62% 59% 63%
International
European $ 55.5 $ 53.9 3% $ 182.5 $ 164.7 11%
Percentage of total revenues 26% 23% 29% 24%
Intercontinental $ 29.1 $ 35.6 -18% $ 79.8 $ 85.7 -7%
Percentage of total revenues 14% 15% 12% 13%
Total International $ 84.6 $ 89.5 -5% $ 262.3 $ 250.4 5%
Percentage of total revenues 40% 38% 41% 37%
Total revenues $ 210.3 $ 233.0 -10% $ 634.9 $ 680.7 -7%
</TABLE>
North American revenues (United States, Canada and Mexico) decreased 12 percent
and 13 percent during the three months and nine months ended September 30, 1998,
respectively, to $125.7 million and $372.6 million from $143.5 million and
$430.3 million for the same periods of 1997. These decreases were primarily due
to lower license fee revenues in North America. International revenues decreased
5 percent for the three months ended September 30, 1998 and increased 5 percent
for the nine months ended September 30, 1998 to $84.6 million and $262.3 million
from $89.5 million and $250.4 million, respectively, for both comparable periods
of 1997. European revenues were up 3 percent and 11 percent for the three months
and nine months ended September 30, 1998, respectively, compared to the same
periods of 1997. The performance in Europe results from both increased license
fee revenues and services revenues. Intercontinental revenues (Japan, Asia
Pacific and South America) decreased 18 percent and 7 percent for the three
months and nine months ended September 30, 1998, respectively, compared to the
same periods of 1997. The decrease in Intercontinental revenues is primarily due
to lower license fee revenues partially offset by slightly higher services
revenues in Asia Pacific and South America.
International revenues were 40 percent and 41 percent of total revenues for the
three months and nine months ended September 30, 1998, respectively, compared to
38 percent and 37 percent in the 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
-12-
<PAGE> 13
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.
<TABLE>
<CAPTION>
COSTS AND EXPENSES
(DOLLARS IN MILLIONS)
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/98 9/30/97 Change 9/30/98 9/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Cost of license fees $8.9 $6.6 35% $28.0 $20.8 35%
Percentage of license fee revenues 9% 5% 9% 6%
Cost of services $57.8 $63.4 -9% $176.7 $187.0 -6%
Percentage of services revenues 52% 57% 53% 58%
Sales and marketing $87.7 $118.0 -26% $299.5 $349.3 -14%
Percentage of total revenues 42% 51% 47% 51%
Product development and
engineering $36.9 $33.9 9% $107.2 $102.9 4%
Percentage of total revenues 18% 15% 17% 15%
General and administrative $15.0 $15.4 -3% $46.0 $47.2 -3%
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 $28.0
million for the three months and nine months ended September 30, 1998,
respectively, compared to $6.6 million and $20.8 million for both comparable
periods of 1997. These costs were 9 percent of license fee revenues for both the
three months and nine months ended September 30, 1998, compared to 5 percent and
6 percent for the comparable periods of 1997. Amortization of capitalized
software costs included in cost of license fees was $4.8 million and $14.7
million for the three months and nine months ended September 30, 1998,
respectively, compared to $2.3 million and $6.0 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(R) Enterprise 11.5, PowerBuilder(R)
6.0 and PowerStudio(TM) during the second half of 1997, and the release of
Adaptive Server(R) 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 $57.8 million and $176.7 million
for the three months and nine months ended September 30, 1998, respectively,
compared to $63.4 million and $187.0 million for comparable periods of 1997.
These changes represent decreases of 9 percent and 6 percent for the three
months and nine months ended September 30, 1998 compared to the same periods of
1997. These costs decreased as a percentage of services revenues to 52 percent
and 53 percent for the three months
-13-
<PAGE> 14
and nine months ended September 30, 1998, respectively, from 57 percent and 58
percent for the 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 the services organization.
Sales and Marketing. Sales and marketing expenses were $87.7 million and $299.5
million for the three months and nine months ended September 30, 1998,
respectively, compared to $118.0 million and $349.3 million for the comparable
periods of 1997. These changes represent decreases of 26 percent and 14 percent
for the three months and nine months ended September 30, 1998, respectively
compared to the same periods of 1997. These costs decreased as a percentage of
total revenues to 42 percent and 47 percent for the three months and nine months
ended September 30, 1998, respectively, compared to 51 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 $36.9 million and
$107.2 million for the three months and nine months ended September 30, 1998,
respectively, compared to $33.9 million and $102.9 million for the same periods
of 1997. As a percentage of total revenues, these costs increased to 18 percent
from 15 percent for the three months ended September 30, 1998 compared to the
same period of 1997. The costs increased to 17 percent from 15 percent for the
nine months ended September 30, 1998 compared to the same period of 1997. The
increase in absolute dollars for the nine months ended September 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 $0.8 million and
$8.2 million of software development costs in the three months and nine months
ended September 30, 1998, respectively, compared to $5.7 million and $13.4
million for the same periods of 1997. The capitalization of software development
costs represents 2 percent and 7 percent of gross product development and
engineering expenditures for the three months and nine months ended September
30, 1998, respectively. By comparison, capitalization of software development
costs for the same periods of 1997 represented 17 percent and 13 percent of such
expenditures, respectively. This capitalization of product development costs in
the first half of 1998 primarily reflects development programs for Adaptive
Server(R) Enterprise 11.9, and enhancements to Replication Server(R) and Jaguar
CTS(TM) products. In the first quarter of 1998, the Company also recorded
capitalized software cost 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 nine months ended September
30, 1998 and 1997, respectively, and remained relatively flat in absolute
dollars with $15.0 million and $46.0 million for the three
-14-
<PAGE> 15
months and nine months ended September 30, 1998, respectively, compared to $15.4
million and $47.2 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.
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 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, $17.1 million was paid out as of September 30, 1998, $11.4
million was included in other accrued liabilities at September 30, 1998 and
$23.1 million consisted of write-offs of property, equipment and improvements,
capitalized software development costs, and other assets. On February 26, 1998,
the Company terminated approximately 600 employees as part of the restructuring.
The Company estimates it will incur additional restructuring charges in the
fourth quarter of 1998. The amount of these charges is undeterminable at this
time.
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS)
(DOLLARS IN MILLIONS)
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/98 9/30/97 Change 9/30/98 9/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Operating income (loss) $4.0 ($4.3) -193% ($74.2) ($26.4) 181%
Percentage of total revenues 2% -2% -12% -4%
Operating income (loss) exclusive of cost $4.0 ($4.3) -193% ($22.6) ($26.4) -15%
of restructuring
Percentage of total revenues 2% -2% -4% -4%
</TABLE>
Operating income was $4.0 million for the three months ended September 30, 1998
compared to an operating loss of $4.3 million for the same period of 1997. This
increase in operating income is primarily due to the cost containment efforts
implemented in the first quarter of 1998. Operating loss was $74.2 million for
the nine months ended September 30, 1998 compared to an operating loss of $26.4
million for the same period of 1997. This increase in operating loss for the
nine months ended September 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. The Company
incurred operating losses, exclusive of cost of restructuring, of $22.6 million
and $26.4 million for the nine months ended September 30, 1998 and 1997,
respectively. The decrease in operating losses, exclusive of cost of
restructuring, is primarily due to the cost containment efforts implemented in
the first quarter of 1998.
-15-
<PAGE> 16
<TABLE>
<CAPTION>
OTHER INCOME AND EXPENSE, NET
(DOLLARS IN MILLIONS)
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/98 9/30/97 Change 9/30/98 9/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income $2.4 $2.4 0% $7.1 $6.5 9%
Percentage of total revenues 1% 1% 1% 1%
Interest expense and other, net $(0.7) $(0.9) -22% $(1.0) $(2.2) -54%
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
including the cost of hedging foreign currency exposures. Interest income in
absolute dollars for the three months ended September 30, 1998 compared to the
same period of 1997 remained constant. The slight increase in interest income
for the nine months ended September 30, 1998 compared to the same period of 1997
is due primarily to larger average invested cash balances over the first half of
1998. The decrease in interest expense and other, net in absolute dollars for
the three months and nine months ended September 30, 1998, compared to both
comparable periods of 1997, is primarily due to lower net cost of hedging
activities.
<TABLE>
<CAPTION>
PROVISION FOR INCOME TAXES
(DOLLARS IN MILLIONS)
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/98 9/30/97 Change 9/30/98 9/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $3.5 $3.2 9% $10.5 $7.7 36%
</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 $10.5 million for
the three months and nine months ended September 30, 1998, respectively,
compared to income tax provisions of $3.2 million and $7.7 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.
-16-
<PAGE> 17
Realization of the Company's deferred tax assets, which totaled $41.0 million at
September 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 provision for income taxes in
future periods.
<TABLE>
<CAPTION>
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/98 9/30/97 Change 9/30/98 9/30/97 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $2.2 ($6.0) -137% ($78.5) ($29.9) 162%
Percentage of total revenues 1% -3% -12% -4%
Basic and diluted net income (loss) per $0.03 ($0.08) -138% ($0.97) ($0.38) 155%
share
Shares used in computing basic net income 81.1 79.3 2% 80.7 78.5 3%
(loss) per share
Shares used in computing diluted net income 81.9 79.3 3% 80.7 78.5 3%
(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 reported a net income of $2.2 million and a net loss of $78.5
million for the three months and nine months ended September 30, 1998,
respectively, compared to a net loss of $6.0 million and $29.9 million for the
comparable periods of 1997. The increase in net income for the three months
ended September 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 nine months ended September 30, 1998 compared
to the same period of 1997 is primarily due to restructuring charges and lower
license fee revenues in 1998. The basic and diluted net income per share was
$0.03 for the three months ended September 30, 1998 compared to a net loss per
share of $0.08 for the same period of 1997. The basic and diluted net loss per
share was $0.97 for the nine months ended September 30, 1998 compared to a net
loss per share of $0.38 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 purchases
under the employee stock purchase plan.
-17-
<PAGE> 18
<TABLE>
<CAPTION>
FINANCIAL CONDITION
(DOLLARS IN MILLIONS)
Nine Nine
Months Months
Ended Ended Percent
9/30/98 9/30/97 Change
------- ------- ------
<S> <C> <C> <C>
Working capital $70.0 $89.1 -21%
Cash, cash equivalents and short-term cash investments $219.5 $230.0 -5%
Net cash provided by operating activities $22.0 $53.1 -59%
Net cash provided by/(used for) investing activities $11.5 ($89.2) 113%
Net cash (used for)/provided by financing activities ($14.5) $65.3 -122%
</TABLE>
Net cash provided by operating activities was $22.0 million for the nine months
ended September 30, 1998 compared to net cash provided by operating activities
of $53.1 million for the same period of 1997. Net cash provided by operating
activities during the nine months ended September 30, 1998 reflects a net loss
of $78.5 million compared to a net loss of $29.9 million for the same period of
1997. Depreciation and amortization charges, which are included in the net
results of operations, but do not require the use of cash, amounted to $81.7
million for the nine months ended September 30, 1998 compared to $78.7 million
in 1997. This increase in depreciation and amortization resulted principally
from the increase in amortization of capitalized software development costs. In
addition, during the nine months ended September 30, 1998, the Company incurred
a non-cash charge to operations in the amount of $23.1 million in connection
with the write-off of assets as part of the restructuring implemented in the
first quarter of 1998.
Net cash provided by investing activities increased to $11.5 million for the
nine months ended September 30, 1998 compared to net cash used for investing
activities of $89.2 million in the same period for 1997. Investing activities
included capital expenditures of $20.8 million for the nine months ended
September 30, 1998 compared to $31.1 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 4,643 at September
30, 1998 from 5,602 at September 30, 1997. Additionally, for the nine months
ended September 30, 1998, investing activities included $6.8 million of cash
provided by the sale of real estate facilities. In the third quarter of 1998,
the Company satisfied its obligation to a lessor releasing $13.3 million from
restricted cash deposits. Net cash provided by the sale, maturity and purchase
of cash investments was $41.5 million for the nine months ended September 30,
1998 compared to net cash used for cash investments of $31.7 million for the
same period of 1997.
Net cash used for financing activities for the nine months ended September 30,
1998 was $14.5 million compared to net cash provided by financing activities of
$65.3 million in the same period for 1997. Net cash used for financing
activities for the nine months ended September 30, 1998 increased due to the
repayment by the Company of amounts received from Japanese financial
institutions in 1997 for financing transactions related to revenues. Such
revenues were
-18-
<PAGE> 19
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 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 September 30, 1998, the Company
had identifiable assets totaling $151.8 million associated with its European
operations and $62.8 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 $220.5 million at September
30, 1998, compared to $230.0 million at September 30, 1997.
On October 22, 1998, the Company repurchased an additional 550,000 shares of its
common stock for $2.9 million pursuant to the Board of Directors' authorization
on February 18, 1998 to repurchase up to $25.0 million of the Company's
outstanding common stock.
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 nine months ended September 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 fee 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
-19-
<PAGE> 20
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
fee 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 nine months ended September 30, 1998. The Company
anticipates it will incur further restructuring charges in the fourth quarter of
1998, which may cause the Company to incur operating losses and net losses for
such period. 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 to focus increasingly 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 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, who each held the
title of Chief Executive Officer. In the fall of 1998, the Company completed an
executive management transition pursuant to which Mr. Chen replaced Mr. Kertzman
as the Company's sole Chief Executive Officer and Chairman of the Board, and Mr.
Kertzman left the Company. During the same period, the Company announced plans
to form a separate Mobile and Embedded Computing (MEC) division to focus
dedicated resources to developing the Company's position in this key database
market. 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 fluctuated widely in 1995, 1996, 1997 and the first nine
months 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
-20-
<PAGE> 21
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 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, during 1998, the country managers in Australia,
Switzerland and Japan resigned or were replaced, and the Company's subsidiaries
in Mexico and Thailand ceased doing business. 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 nine months 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
-21-
<PAGE> 22
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 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 nine months of
1998, the Company achieved a number of milestones, including the shipment to
several application partners of Adaptive Server(R) Enterprise with row-level
locking capabilities. In October 1998, the Company also announced the general
availability of Adaptive Server(R) Anywhere for Windows CE. The Company
currently is in the process of combining a number of its products into
integrated product sets such as Enterprise Application Studio(TM), which
includes Jaguar CTS(TM) and PowerDynamo(TM); and SQL Anywhere(TM) Studio, which
includes Adaptive Server(R) Anywhere, InfoMaker(R) and jConnect(TM) for
JBDC(TM). Creation of such 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 and service revenues, particularly if
such product sets are not well-received in the marketplace.
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 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.
-22-
<PAGE> 23
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 personnel is intense in the software
industry and, Sybase believes, has increased substantially in recent years.
There were several changes in 1997 and 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 the fall of 1998, the
Company completed an executive management transition pursuant to which Mr. Chen
replaced Mr. Kertzman as the Company's sole Chief Executive Officer and Chairman
of the Board, and Mr. Kertzman left the Company. 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 from its
Emeryville, California and Massachusetts distribution facilities. 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 one or more of
these facilities 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
-23-
<PAGE> 24
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. The Company estimates it will incur additional restructuring
charges in the fourth quarter of 1998. The amount of these charges is
undeterminable at this time. However, as these are forward-looking statements,
future actual results may differ based on the factors described above.
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 and which prohibits the
restatement of prior financial statements. 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.
As of September 1998, the Company completed its assessment of all of its
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 compatible. The outstanding list of nonconforming applications and systems
is small and the Company believes it has identified
-24-
<PAGE> 25
upgrade or replacement solutions to make all of these systems Year 2000
compatible. Most outstanding items are scheduled for installation of certified
upgrades from suppliers by January 1999, and the Company expects to effect all
solutions by July 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. 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 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.
-25-
<PAGE> 26
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
-26-
<PAGE> 27
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.
November 10, 1998 SYBASE, INC.
By /s/ JACK L. ACOSTA
----------------------------------------
Jack L. Acosta
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
By /s/ PIETER VAN DER VORST
----------------------------------------
Pieter Van der Vorst
Vice President and Corporate Controller
(Principal Accounting Officer)
-27-
<PAGE> 28
EXHIBIT INDEX TO SYBASE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
-28-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED FINANCIAL STATEMENTS OF SYBASE INC. AS OF SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 204,725
<SECURITIES> 15,790
<RECEIVABLES> 200,906
<ALLOWANCES> (32,938)
<INVENTORY> 0
<CURRENT-ASSETS> 422,256
<PP&E> 367,887
<DEPRECIATION> (256,451)
<TOTAL-ASSETS> 661,405
<CURRENT-LIABILITIES> 352,232
<BONDS> 0
0
0
<COMMON> 82
<OTHER-SE> 410,964
<TOTAL-LIABILITY-AND-EQUITY> 661,405
<SALES> 300,683
<TOTAL-REVENUES> 634,944
<CGS> 27,953
<TOTAL-COSTS> 504,136
<OTHER-EXPENSES> 204,981
<LOSS-PROVISION> 1,506
<INTEREST-EXPENSE> 414
<INCOME-PRETAX> (68,018)
<INCOME-TAX> 10,520
<INCOME-CONTINUING> (78,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (78,538)
<EPS-PRIMARY> (0.97)<F1>
<EPS-DILUTED> (0.97)
<FN>
<F1>REFLECTS BASIC EPS ACCORDING TO SFAS 128, EARNINGS PER SHARE
</FN>
</TABLE>
