<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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File number 0-19395
SYBASE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-2951005
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6475 Christie Avenue, Emeryville, CA 94608
------------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (510) 922-3500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On October 31, 1999, 81,529,825 shares of the Registrant's Common Stock, $.001
par value, were outstanding.
<PAGE> 2
SYBASE, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999 and 3
December 31, 1998
Condensed Consolidated Statements of Operations for the three 4
and nine months ended September 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows for the nine months 5
ended September 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
Item 3: Quantitative and Qualitative Disclosures of Market Risk 27
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 28
Signatures 29
Exhibit Index 30
</TABLE>
2
<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except share and per share data) 1999 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 217,344 $ 224,665
Short-term cash investments 57,895 23,967
--------- ---------
Total cash, cash equivalents and short-term cash investments 275,239 248,632
Accounts receivable, net 167,485 199,303
Deferred income taxes 20,978 20,903
Other current assets 12,388 8,862
--------- ---------
Total current assets 476,090 477,700
Long-term cash investments 43,829 981
Property, equipment and improvements, net 71,540 101,433
Deferred income taxes 20,173 20,152
Capitalized software, net 36,668 35,773
Other assets 48,182 60,565
--------- ---------
Total assets $ 696,482 $ 696,604
========= =========
Current liabilities:
Accounts payable $ 10,478 $ 12,747
Accrued compensation and related expenses 48,174 49,061
Accrued income taxes 37,959 26,736
Other accrued liabilities 96,605 114,346
Deferred revenue 170,579 190,631
--------- ---------
Total current liabilities 363,795 393,521
Other liabilities 5,987 2,011
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $0.001 par value, 8,000,000
shares authorized; none issued or outstanding -- --
Common stock, $0.001 par value, 200,000,000
shares authorized; 82,561,537 shares issued and 81,765,668
outstanding (1998-81,769,334 shares issued and 81,169,334
outstanding) 83 82
Additional paid-in capital 421,204 416,501
Accumulated deficit (70,866) (102,471)
Accumulated other comprehensive loss (14,082) (9,702)
Cost of 795,869 shares of treasury stock (1998-600,000 shares) (9,639) (3,338)
--------- ---------
Total stockholders' equity 326,700 301,072
--------- ---------
Total liabilities and stockholders' equity $ 696,482 $ 696,604
========= =========
</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) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 104,216 $ 98,759 $ 298,189 $ 300,683
Services 111,887 111,498 336,369 334,261
--------- --------- --------- ---------
Total revenues 216,103 210,257 634,558 634,944
Costs and expenses:
Cost of license fees 9,204 8,921 29,992 27,953
Cost of services 55,880 57,807 162,032 176,654
Sales and marketing 79,135 87,684 241,305 299,529
Product development and engineering 34,823 36,865 107,387 107,258
General and administrative 16,630 15,016 51,417 46,029
Cost of restructuring (reversals) -- -- (5,619) 51,694
--------- --------- --------- ---------
Total costs and expenses 195,672 206,293 586,514 709,117
--------- --------- --------- ---------
Operating income (loss) 20,431 3,964 48,044 (74,173)
Interest income 3,477 2,403 9,878 7,145
Interest expense and other, net 1,251 (660) 1,473 (990)
--------- --------- --------- ---------
Income (loss) before income taxes 25,159 5,707 59,395 (68,018)
Provision for income taxes 9,103 3,500 23,164 10,520
--------- --------- --------- ---------
Net income (loss) $ 16,056 $ 2,207 $ 36,231 $ (78,538)
========= ========= ========= =========
Basic net income (loss) per share $ 0.20 $ 0.03 $ 0.44 $ (0.97)
========= ========= ========= =========
Shares used in computing basic net income (loss) per
share 81,611 81,137 81,861 80,744
========= ========= ========= =========
Diluted net income (loss) per share $ 0.19 $ 0.03 $ 0.43 $ (0.97)
========= ========= ========= =========
Shares used in computing diluted net income (loss) per
share 84,088 81,936 83,717 80,744
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended
September 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash and cash equivalents, beginning of year $ 224,665 $ 188,876
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 36,231 (78,538)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 68,906 81,712
Write off of assets in restructuring (545) 23,126
Loss on disposal of assets 3,178 --
Changes in assets and liabilities:
Accounts receivable 33,963 27,522
Other current assets (4,573) 156
Accounts payable (2,269) (7,854)
Accrued compensation and related expenses (887) 1,778
Accrued income taxes 11,223 (4,526)
Other accrued liabilities (13,967) (13,331)
Deferred revenues (20,052) (8,376)
Other 1,137 313
--------- ---------
Net cash provided by operating activities 112,345 21,982
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale cash investments (114,651) (23,422)
Maturities of available-for-sale cash investments 30,345 34,755
Sales of available-for-sale cash investments 7,530 30,138
Business combinations, net of cash acquired (8,047) (5,000)
Purchases of property, equipment and improvements (21,083) (20,795)
Sale of property, equipment and improvements 11,036 6,808
Capitalized software development costs (14,178) (8,162)
Decrease in other assets 156 (2,855)
--------- ---------
Net cash (used for)/provided by investing activities (108,892) 11,467
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in other current liabilities (1,432) (27,132)
Proceeds from issuance of common stock 4,704 13,041
Proceeds from the issuance of treasury stock 20,607 --
Purchases of treasury stock (31,533) (431)
--------- ---------
Net cash used for financing activities (7,654) (14,522)
Effect of exchange rate changes on cash (3,120) (3,078)
--------- ---------
Net (decrease)/increase in cash and cash equivalents (7,321) 15,849
Cash and cash equivalents, end of period 217,344 204,725
Cash investments, end of period 101,724 15,790
--------- ---------
Total cash, cash equivalents, and cash investments,
end of period $ 319,068 $ 220,515
========= =========
Supplemental disclosures:
Interest paid $ 76 $ 414
========= =========
Income taxes paid $ 11,441 $ 10,140
========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
SYBASE INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements include the accounts of Sybase, Inc. and its subsidiaries
(Sybase, or the Company), and, in the opinion of management, reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly state the Company's consolidated financial position, results of
operations, and cash flows as of and for the dates and periods presented. The
condensed consolidated balance sheet as of December 31, 1998 has been prepared
from the audited consolidated financial statements of the Company.
These unaudited condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements
included in its Annual Report to Stockholders for the year ended December 31,
1998. The results of operations for the three and nine months ended September
30, 1999 are not necessarily indicative of results for the entire fiscal year
ending December 31, 1999.
2. Business Combinations. In February 1999, the Company acquired Data
Warehouse Network (DWN), an Ireland-based, privately held provider of packaged,
industry-specific business intelligence applications. Under terms of the
acquisition agreement, the Company paid $2.7 million in cash for certain assets
and assumed certain liabilities of DWN. In addition, pursuant to the terms of
the agreement, the Company is obligated to make contingent payments based on
certain agreed-upon performance criteria. The aggregate maximum additional
amount payable over a three-year period is $5.3 million. The transaction was
accounted for as a purchase. Substantially all of the amount paid was allocated
to purchased software and intangible assets. The results of operations of DWN
have not been material in relation to those of the Company and are included in
the consolidated results of operations for periods subsequent to the acquisition
date.
In March 1999, the Company paid $5.3 million for Convertible Secured Promissory
Notes due December 31, 2002 issued by Demica PLC (Demica), a provider of a
wholesale banking application using the Company's technology. The notes bear
interest at 8 percent per annum and are convertible into 29.9 percent of the
share capital of Demica. The Company accounts for its investment in this entity
under the equity method of accounting.
On February 2, 1998, Sybase acquired Intellidex Systems, L.L.C. (Intellidex), a
provider of meta data management technology for deploying and managing data
warehouse environments. Under terms of the acquisition agreement, Sybase paid
$5.0 million in cash for certain assets and assumed certain liabilities of
Intellidex. Of the amount paid, $3.7 million was allocated to purchased software
and the balance of $1.3 million was allocated to other intangible assets. In
addition, pursuant to the terms of the agreement, Sybase is obligated to make
contingent payments based on certain agreed upon performance criteria. The
aggregate maximum additional amount payable over a three-year period is $9.2
million. The transaction was accounted for as a purchase. The results of
operations of Intellidex have not been material in relation to those of the
6
<PAGE> 7
SYBASE INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Company and are included in the consolidated results of operations for periods
subsequent to the acquisition date.
3. Costs of Restructuring (Reversals). In February 1998, the Company announced
and began to implement a restructuring plan aimed at reducing costs, restoring
profitability to operations and focusing the Company's products around its core
businesses. This restructuring activity consisted primarily of terminating
employees, terminating certain product lines, vacating certain facilities and
canceling real estate leases as a result of the employee terminations. In the
nine months ended September 30, 1999, the Company reversed by credit to
operating expenses $5.6 million of restructuring costs related to the 1998
restructuring activity. The significant components included: (i) approximately
$1.8 million for termination payments due to employees who were terminated as
part of the 1998 restructuring activity but who left the Company prior to their
exit date, and therefore, did not qualify for such payments; and (ii)
approximately $3.1 million related to lease cancellations and commitments where
the Company was able to sublet certain closed facilities earlier than
anticipated.
The following table summarizes the activity related to the restructuring
liability for the nine months ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Accrued Accrued
Liabilities Liabilities
at Amounts Paid or Amounts at
12/31/98 Written Off Reversed 9/30/99
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Termination payments to employees and
other related costs $12,483 $ 9,797 $ 1,810 $ 876
Lease cancellations and commitments 9,538 2,652 3,105 3,781
Costs related to closing of subsidiaries, including
write-off of goodwill 2,730 2,730 -- --
Other 2,567 710 704 1,153
------- ------- ------- -------
$27,318 $15,889 $ 5,619 $ 5,810
======= ======= ======= =======
</TABLE>
The Company expects that significantly all of the remaining $5.8 million accrued
liability balance at September 30, 1999 will be extinguished over the next three
months.
4. Net income (loss) per share. Shares used in computing basic and diluted net
income (loss) per share are based on the weighted average shares outstanding in
each period, excluding treasury stock. Basic net income (loss) per share
excludes any dilutive effects of stock options. Diluted net income (loss) per
share includes the dilutive effect of the assumed exercise of stock options
using the treasury stock method. The following table shows the computation of
basic and diluted net income (loss) per share:
7
<PAGE> 8
SYBASE INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/99 9/30/98 9/30/99 9/30/98
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 16,056 $ 2,207 $ 36,231 $(78,538)
Shares used in computing basic net
income (loss) per share 81,611 81,137 81,861 80,744
Effect of dilutive securities -
stock options 2,477 799 1,856 --(a)
-------- -------- -------- --------
Shares used in computing diluted
net income (loss) per share 84,088 81,936 83,717 80,744
Basic net income (loss) per share $ 0.20 $ 0.03 $ 0.44 $ (0.97)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.19 $ 0.03 $ 0.43 $ (0.97)
======== ======== ======== ========
</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.
5. Comprehensive Income (Loss). The following table sets forth the calculation
of comprehensive income (loss) for all periods presented:
<TABLE>
<CAPTION>
(In thousands) Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/99 9/30/98 9/30/99 9/30/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 16,056 $ 2,207 $ 36,231 $(78,538)
Foreign currency translations gains/(losses)
(b) 956 2,395 (4,380) 1,177
-------- -------- -------- --------
Comprehensive income (loss) $ 17,012 $ 4,602 $ 31,852 $(77,361)
======== ======== ======== ========
</TABLE>
(b) Foreign currency translation gains are net of tax
6. New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (Statement
133). Statement 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. In June 1999, the FASB issued Statement No.137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," which amended Statement No. 133 by deferring
the effective date to the fiscal year beginning after June 30, 2000. The Company
has not determined the effect, if any, that adoption will have on its
consolidated financial position or results of operations.
8
<PAGE> 9
SYBASE INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company adopted Statement of Position 97-2, "Software Revenue Recognition"
(SOP 97-2) and Statement of Position 98-4 "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition" (SOP 98-4) as of January 1,
1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue on software
transactions and supersede Statement of Position 91-1, "Software Revenue
Recognition". The adoption of SOP 97-2 and SOP 98-4 did not have a material
impact on the Company's consolidated financial results. However, full
implementation guidelines for these standards have not been issued. Once
available, the current revenue recognition accounting practices may need to
change and such changes could affect the Company's future revenues and results
of operations.
In December 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions" (SOP 98-9). SOP 98-9 amends
SOP 98-4 to extend the deferral of the application of certain passages of SOP
97-2 provided by SOP 98-4 through fiscal years beginning after March 15, 1999.
The Company does not expect a material impact from the final adoption of SOP
98-9 on its future revenues and results of operations.
7. Segment Information. The Company helps businesses integrate, manage and
deliver applications, content and data anywhere they are needed. The Company's
software products, combined with its professional services and partner
technologies, provide a comprehensive platform for delivering integrated
solutions to businesses. The Company is organized into four separate business
divisions, each of which maintains financial accountability for its operating
results, dedicated product development and engineering, sales and product
marketing, partner relationship management and customer support teams.
The Enterprise Solutions Division (ESD) delivers products, technical support and
professional services required by businesses for developing and maintaining
operational systems. The Mobile and Embedded Computing Division (MEC) provides
solutions which enable customers to synchronize data seamlessly across their
mobile business systems, including laptops, handheld computing devices, pagers
and intelligent appliances. The Internet Applications Division (IAD) delivers a
combination of technologies used in the development and deployment of complex
Internet-enabled applications. The Business Intelligence Division (BID) delivers
database management systems, warehouse design tools and central meta data
management facilities.
The Company reports its ESD, MEC, IAD and BID divisions as reportable segments
in accordance with Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (Statement
131). The Company has not presented the reportable segments discussed above for
the three and nine months ended September 30, 1998, since these segments were
not established until 1999, and it would be impractical to restate prior periods
on this basis. The Company had two reportable segments in 1998: license fees and
professional services. The Company's consolidated statements of operations
disclose the available data for the two reportable segments identified above for
the three and nine months ended September 30, 1999 and 1998.
9
<PAGE> 10
SYBASE INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In 1999, the Company's Chief Operating Decision Maker (CODM), which is the
President and Chief Executive Officer, evaluates performance based upon a
measure of segment operating profit or loss which includes an allocation of
common expenses, but excludes certain unallocated expenses. Segment revenue
includes transactions between the segments. These revenues are transferred to
the applicable segments less amounts retained which are intended to reflect the
costs incurred by the transferring segment. Allocated common costs and expenses
are allocated on measurable drivers of expense. Unallocated expenses represent
corporate expenditures that are not specifically allocated to the segments. The
Company's CODM does not view segment results below operating profit (loss), and
therefore, interest income, interest expense and other, net and the provision
for income taxes are not broken out by segment. The Company does not account for
or report to the CODM its assets or capital expenditures by segment.
A summary of the segment financial information reported to the CODM for the
three months ended September 30, 1999 is presented below:
<TABLE>
<CAPTION>
(In thousands) Consolidated
ESD IAD MEC BID Elimination Total
-------- -------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees $ 75,463 $ 16,811 $ 8,194 $ 3,748 $ -- $104,216
Services 111,744 -- 67 76 -- 111,887
-------- -------- -------- -------- -------- --------
Direct revenues from external customers 187,207 16,811 8,261 3,824 -- 216,103
Intersegment revenues 213 7,286 11,201 3,362 (22,062) --
-------- -------- -------- -------- -------- --------
Total revenues 187,420 24,097 19,462 7,186 (22,062) 216,103
Total allocated costs and expenses 170,394 20,368 13,711 8,164 (22,062) 190,575
-------- -------- -------- -------- -------- --------
Operating income (loss) before
unallocated expenses 17,026 3,729 5,751 (978) -- 25,528
Unallocated expenses 5,097
--------
Operating income 20,431
Interest income, interest expense and
other, net 4,728
--------
Income before income taxes 25,159
</TABLE>
A summary of the segment financial information reported to the CODM for the nine
months ended September 30, 1999 is presented below:
<TABLE>
<CAPTION>
(In thousands) Consolidated
ESD IAD MEC BID Elimination Total
-------- -------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees $214,602 $ 49,274 $ 26,603 $ 7,710 $ -- $298,189
Services 335,841 -- 67 461 -- 336,369
-------- -------- -------- -------- -------- --------
Direct revenues from external customers 550,443 49,274 26,670 8,171 -- 634,558
Intersegment revenues 990 22,976 26,730 8,712 (59,408) --
-------- -------- -------- -------- -------- --------
Total revenues 551,433 72,250 53,400 16,883 (59,408) 634,558
Total allocated costs and expenses 498,321 61,551 39,599 24,124 (59,408) 564,187
-------- -------- -------- -------- -------- --------
Operating income (loss) before
unallocated expenses 53,112 10,699 13,801 (7,241) -- 70,371
Unallocated expenses 22,327
--------
Operating income 48,044
Interest income, interest expense and 11,351
other, net
--------
Income before income taxes 59,395
</TABLE>
10
<PAGE> 11
SYBASE INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. During the third quarter of 1999, the Company sold its facility in Concord,
Massachusetts and simultaneously entered into a sales-leaseback agreement. Under
the terms of this agreement, the Company entered into a seven-year operating
lease. The sales price of $5.3 million resulted in a book gain of $2.8 million,
which will be amortized over the seven-year lease period.
Future minimum lease payments under this noncancellable operating lease as of
September 30, 1999 are as follows:
<TABLE>
<S> <C>
1999 $ 177,800
2000 535,200
2001 535,200
2002 544,900
2003 564,200
Thereafter 1,504,500
----------
Total minimum lease payments $3,861,800
</TABLE>
9. On July 20, 1999, the Board of Directors authorized the repurchase of up to
an additional $75 million of the Company's outstanding common stock. The plan
continued a $25 million repurchase program authorized by the Board of Directors
in 1998 to allow the Company to use available cash balances to buy back its
common stock in open market transactions from time to time, subject to price and
market conditions. As of September 30, 1999, the Company held a balance of
795,869 shares that had been repurchased under the program.
10. Litigation. Following the Company's announcement on April 3, 1995 of its
preliminary results for the first fiscal quarter ended March 31, 1995, several
class action lawsuits were filed against the Company and certain of its
officers in the Northern California District Court. On April 21, 1999, the
Company and all the individual defendants reached an agreement in principle
with plaintiffs to settle the case for $14,800,000, of which $1,500,000 is to
be paid by the Company and the remainder of which is to be paid by the
Company's insurers. The Company has paid its share of the settlement to
plaintiff's escrow fund, and intends to carry out the terms of the settlement
agreement. On April 29, 1999, during the time in which the settlement agreement
was being formally documented, the District Court granted summary judgment in
favor of the Company and all the individual defendants. Plaintiffs have
appealed the judgment to the United States Court of Appeals, Ninth Circuit.
11
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/99 9/30/98 Change 9/30/99 9/30/98 Change
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
License fees $104.2 $ 98.8 6% $298.2 $300.7 (1%)
Percentage of total revenues 48% 47% 47% 47%
Services $111.9 $111.5 0% $336.4 $334.3 1%
Percentage of total revenues 52% 53% 53% 53%
Total revenues $216.1 $210.3 3% $634.6 $635.0 0%
</TABLE>
Total revenues for the three months ended September 30, 1999 increased 3 percent
to $216.1 million as compared to $210.3 million for the three months ended
September 30, 1998. For the nine months ended September 30, 1999, total revenues
remained relatively consistent at $634.6 million as compared to $635.0 million
for the nine months ended September 30, 1998.
License fees revenues increased 6 percent to $104.2 million in the three months
ended September 30, 1999, as compared to $98.8 million for the three months
ended September 30,1998. For the nine months ended September 30,1999, license
fees revenues decreased 1 percent to $298.2 million as compared to $300.7
million for the nine months ended September 30,1998. The increase in license
fees during the quarter is primarily due to increased sales of the Sybase data
warehouse products. The Company believes the slight decrease in license fees
revenues for the nine months ended September 30, 1999 is primarily due to
companies continuing to reallocate available technology resources toward "Year
2000" compliance solutions. The products that contributed to the decline in
license fees revenues were primarily enterprise server database products.
Whether the decline in license fees revenues continues will depend, in part, on
the Company's ability to enhance existing products and to introduce, on a timely
basis, new products that meet customer requirements. See "Future Operating
Results."
Services revenues remained relatively consistent at $111.9 million for the three
months ended September 30, 1999 as compared to $111.5 million in the three
months ended September 30, 1998. For the nine months ended September 30, 1999,
services revenues increased 1 percent to $336.4 million as compared to $334.3
million in the nine months ended September 30, 1998. Services revenues consist
primarily of consulting, education and other services related to the development
and deployment of applications using the Company's software products, and
product support and maintenance fees. Services revenues as a percentage of total
revenues decreased to 52 percent for the three months ended September 30, 1999
as compared to 53 percent for the three months ended September 30, 1998 and
remained consistent at 53 percent for nine months ended September 30, 1999 and
September 30, 1998, respectively.
12
<PAGE> 13
GEOGRAPHICAL REVENUES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/99 9/30/98 Change 9/30/99 9/30/98 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
North American $136.7 $125.7 9% $389.5 $372.6 5%
Percentage of total revenues 63% 60% 61% 59%
International
European $ 52.0 $ 55.5 (6%) $165.9 $182.5 (9%)
Percentage of total revenues 24% 26% 26% 29%
Intercontinental $ 27.4 $ 29.1 (6%) $ 79.2 $ 79.8 (1%)
Percentage of total revenues 13% 14% 13% 12%
Total International $ 79.4 $ 84.6 (6%) $245.1 $262.3 (7%)
Percentage of total revenues 37% 40% 39% 41%
Total revenues $216.1 $210.3 3% $634.6 $634.9 0%
</TABLE>
North American revenues (United States, Canada and Mexico) increased 9% to
$136.7 million for the three months ended September 30, 1999, as compared to
$125.7 million for the three months ended September 30, 1998. North American
revenues increased 5 percent to $389.5 million for the nine months ended
September 30, 1999, as compared to $372.6 million for the nine months ended
September 30, 1998. The increase during the nine-month period was due to higher
license fees revenue in North America. International revenues decreased 6
percent for the three months ended September 30, 1999, to $79.4 million from
$84.6 million. For the nine months ended September 30, 1999, international
revenues decreased 7 percent to $245.1 million from $262.3 million. European
revenues decreased 6 percent and 9 percent for the three and nine months ended
September 30, 1999 compared to the same periods of 1998. The decrease in
European revenues was due primarily to lower license fees revenues.
Intercontinental revenues (Japan, Asia Pacific and South America) decreased 6
percent for the three months ended September 30, 1999 as compared to the three
months ended September 30, 1998. This decrease was primarily related to lower
license fees revenues. Intercontinental revenues decreased by 1 percent in the
nine months ended September 30, 1999 as compared to the same period of 1998.
This slight decrease in revenue was attributable to lower license fees revenues.
International revenues were 37 percent and 39 percent of total revenues for the
three and nine months ended September 30, 1999, compared to 40 percent and 41
percent for the three and nine months ended September 30, 1998.
Although the Company takes into account changes in exchange rates over time in
its pricing strategy, the Company's business and results of operations could be
materially and adversely affected by unanticipated fluctuations in foreign
currency exchange rates. Changes in foreign currency exchange rates, the
strength of local economies, and the general volatility of worldwide software
markets may result in a higher or lower proportion of foreign revenues as a
percentage of total revenues in the future.
13
<PAGE> 14
COSTS AND EXPENSES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/99 9/30/98 Change 9/30/99 9/30/98 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cost of license fees $ 9.2 $ 8.9 3% $ 30.0 $ 28.0 7%
Percentage of license fees revenues 9% 9% 10% 9%
Cost of services $ 55.9 $ 57.8 (3%) $162.0 $176.7 (8%)
Percentage of services revenues 50% 52% 48% 53%
Sales and marketing $ 79.1 $ 87.7 (10%) $241.3 $299.5 (19%)
Percentage of total revenues 37% 42% 38% 47%
Product development and
engineering $ 34.8 $ 36.9 (5%) $107.4 $107.2 0%
Percentage of total revenues 16% 18% 17% 17%
General and administrative $ 16.6 $ 15.0 11% $ 51.4 $ 46.0 12%
Percentage of total revenues 8% 7% 8% 7%
Cost of restructuring (reversals) -- -- -- $ (5.6) $ 51.7 *
Percentage of total revenues -- -- -- (1%) 8% --
</TABLE>
- ---------------
* Not meaningful
Cost of License Fees. Cost of license fees consists primarily of product costs
(media and documentation), amortization of purchased software and capitalized
software development costs, and third-party royalty costs. These costs were $9.2
million and $30.0 million for the three and nine months ended September 30,
1999, respectively, as compared to $8.9 million and $28.0 million for the same
periods in 1998. Such costs were 9 percent and 10 percent of license fees
revenue for the three and nine months ended September 30, 1999, respectively, as
compared to 9 percent for the same periods in 1998. The increase in the cost of
license fees in the nine months ended September 30, 1999 as compared to the nine
months ended September 30, 1998 was primarily due to an increase in royalties
payable to third parties. Amortization of purchased software and capitalized
software costs included in cost of license fees was $5.1 million and $14.7
million for the three and nine months ended September 30, 1999, respectively, as
compared to $4.8 million and $14.7 million for the three and nine months ended
September 30, 1998.
Cost of Services. Cost of services consists primarily of maintenance, consulting
and education expenses and, to a lesser degree, services-related product costs
(media and documentation). These costs were $55.9 million and $162.0 million in
the three and nine months ended September 30, 1999, respectively, as compared to
$57.8 million and $176.7 million for the comparable periods of 1998. These
changes represent decreases of 3 percent and 8 percent for the three and nine
months ended September 30, 1999 as compared to the same periods of 1998. These
costs decreased as a percentage of services revenues to 50 percent and 48
percent for the three and nine months ended September 30, 1999, respectively,
from 52 percent and 53 percent
14
<PAGE> 15
for the same periods in 1998. The decrease in cost of services in absolute
dollars and as a percentage of services revenues for both comparable periods is
primarily due to a decrease in salaries, facility costs including rent, and
depreciation as a result of the Company's restructuring plan initiated in 1998.
Sales and Marketing. Sales and marketing expenses were $79.1 million and $241.3
million for the three and nine months ended September 30, 1999, respectively,
compared to $87.7 million and $299.5 million for the same periods in 1998. These
changes represent decreases of 10 percent and 19 percent for the three and nine
months ended September 30, 1999 compared to the same periods of 1998. These
costs decreased as a percentage of total revenues to 37 percent and 38 percent
in the three and nine months ended September 30, 1999, respectively, as compared
to 42 percent and 47 percent for the same periods of 1998. The decrease in sales
and marketing expenses in absolute dollars and as a percentage of total revenues
for both comparable periods is primarily due to a decrease in salary cost,
facility costs including rent, and depreciation as a result of the Company's
restructuring plan initiated in 1998. The decrease in sales and marketing
expense was partially offset by an increase in allocated common costs pertaining
to legal fees and litigation costs in connection with defending its lawsuits.
The Company allocates certain common costs including legal, litigation,
accounting, human resources, external consulting, employee benefits, and
facilities costs to sales and marketing, product development and engineering,
and general and administrative expenses.
Product Development and Engineering. Product development and engineering
expenses (net of capitalized software development costs) were $34.8 million and
$107.4 million in the three and nine months ended September 30, 1999,
respectively, as compared to $36.9 million and $107.2 million in the same
periods of 1998. These costs as a percentage of total revenues were 16 percent
and 17 percent in the three and nine months ended September 30, 1999, as
compared to 18 percent and 17 percent in the three and nine months ended
September 30, 1998, respectively. The decrease in product development and
engineering expenses for the three months ended September 30, 1999 was primarily
due to an increase in the capitalization of software development costs which
were partially offset by an increase in allocated common costs.
The Company capitalized approximately $5.6 million and $14.2 million of software
development costs in the three and nine months ended September 30, 1999 as
compared to $0.8 million and $8.2 million in the three and nine months ended
September 30, 1998. In the nine months ended September 30, 1999, capitalized
software costs included costs incurred for the development of Adaptive Server(R)
Enterprise 12.0, Enterprise Application Studio(TM) 3.0, Jaguar CTS(TM) 3.0 and
3.5, Replication Server(R) 12.0 and PowerDesigner(R) 7.0. The Company believes
that product development and engineering expenditures are essential to
technology and product leadership and expects product development and
engineering expenditures to continue to be significant, both in absolute dollars
and as a percentage of total revenues.
General and Administrative. General and administrative expenses were $16.6
million and $51.4 million in the three and nine months ended September 30, 1999,
respectively, as compared to $15.0 million and $46.0 million in the same periods
of 1998. General and administrative expenses represented 8 percent of total
revenues in the three and nine months ended September 30, 1999, as compared to 7
percent of total revenues in the three and nine months ended September 30, 1998.
The increase in general and administrative expenses for both comparable periods
is primarily due to an increase in allocated common costs.
15
<PAGE> 16
Cost of Restructuring (Reversals). The Company incurred restructuring charges in
the amount of $51.7 million and $22.5 million in the first and fourth quarters
of 1998, respectively. As a result of a substantial loss incurred during 1997,
the Company formulated a restructuring plan, which was instituted in February
1998 ("the 1998 Plan"). The 1998 Plan was intended to significantly reduce
annual operating expenses by realigning the Company's resources around its core
product initiatives. Under the 1998 Plan, the Company estimated restructuring
charges of $70 million to be incurred during 1998. The 1998 Plan included the
termination of approximately 1,100 employees, the discontinuation of certain
product offerings including Sybase MPP(TM), certain APT products, dbQueue(TM),
Web.SQL(TM), Lego Rom and Powerbuilder(R) for Mac, the consolidation or closure
of more than 30 facilities worldwide, and the closure of subsidiaries in
Thailand, Peru, Chile, Venezuela and Mexico. The Company believes the
restructuring actions have reduced its overall cost structure.
In the nine months ended September 30, 1999, the Company reversed by credit to
operating expenses $5.6 million of restructuring costs related to the 1998 Plan.
The significant components included (i) approximately $1.8 million for
termination payments due to employees who were terminated as part of the 1998
Plan, but who left the Company prior to their exit date, and therefore, did not
qualify for such benefits; and (ii) approximately $3.1 million related to lease
cancellations and commitments where the Company was able to sublet certain
closed facilities earlier than anticipated.
The following table summarizes the activity related to the restructuring
liability for the nine months ended September 30, 1999:
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accrued Amounts Accrued
Liabilities at Paid or Amounts Liabilities at
12/31/98 Written Off Reversed 9/30/99
-------- ----------- -------- -------
<S> <C> <C> <C> <C>
Termination payments to employees and other
related costs $12,483 $ 9,797 $ 1,810 $ 876
Lease cancellations and commitments 9,538 2,652 3,105 3,781
Costs related to closing of subsidiaries,
including write-off of goodwill 2,730 2,730 -- --
Other 2,567 710 704 1,153
------- ------- ------- -------
$27,318 $15,889 $ 5,619 $ 5,810
======= ======= ======= =======
</TABLE>
The Company expects that significantly all of the remaining $5.8 million accrued
liability balance at September 30, 1999 will be extinguished over the next three
months.
OPERATING INCOME (LOSS)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/99 9/30/98 Change 9/30/99 9/30/98 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating income (loss) $ 20.4 $ 4.0 415% $ 48.0 $(74.2) *
Percentage of total revenues 10% 2% 8% (12%)
Operating income (loss) exclusive of
cost of restructuring (reversals) $ 20.4 $ 4.0 415% $ 42.4 $(22.6) *
Percentage of total revenues 10% 2% 7% (4%)
</TABLE>
- ---------------
* Not meaningful
16
<PAGE> 17
Operating income was $20.4 million and $42.4 million for the three and nine
months ended September 30, 1999, respectively (exclusive of cost of
restructuring reversals of $5.6 million), compared to operating income of $4.0
million and an operating loss of $22.6 million (exclusive of $51.7 million cost
of restructuring charges) in the three and nine months ended September 30, 1998,
respectively. The increase in operating income in the three months ended
September 30, 1999 compared to the three months ended September 30, 1998 is
related to a reduction in expenses associated with the 1998 Plan and increased
license revenues. The increase in operating income in the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998 is
primarily related to a reduction in expenses associated with the 1998 Plan.
OTHER INCOME AND EXPENSE, NET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/99 9/30/98 Change 9/30/99 9/30/98 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 3.5 $ 2.4 45% $ 9.9 $ 7.1 38%
Percentage of total revenues 2% 1% 2% 1%
Interest expense and other, net $ 1.3 $ (0.7) * $ 1.5 $ (1.0) *
Percentage of total revenues 1% * 0% *
</TABLE>
- ---------------
* Not meaningful
Other income and expense, net consists primarily of interest earned on cash
investments, gains from the disposition of certain real estate, bank fees and
net gains and losses resulting from the Company's foreign currency transactions
and related hedging activities, including the cost of hedging foreign currency
exposures. Interest income in absolute dollars for the three and nine months
ended September 30, 1999 increased $1.1 million and $2.7 million, respectively,
as compared to the three and nine months ended September 30, 1998. This increase
is due primarily to larger average invested cash balances in 1999. The increase
in interest expense and other, net, in absolute dollars for the three and nine
months ended September 30, 1999, as compared to the three and nine months ended
September 30, 1998, is due primarily to the gain on the sale of certain real
estate.
PROVISION FOR INCOME TAXES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/99 9/30/98 Change 9/30/99 9/30/98 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $ 9.1 $ 3.5 160% $ 23.2 $ 10.5 120%
</TABLE>
The Company recorded income tax provisions of $9.1 million and $23.2 million in
the three and nine months ended September 30, 1999, respectively, as compared
$3.5 million and $10.5
17
<PAGE> 18
million in the three and nine months ended September 30, 1998. The income tax
provisions for these periods are primarily the result of tax on earnings
generated from operations and withholding taxes on revenues in certain
international jurisdictions.
The Company had net deferred tax assets of $41.1 million at September 30, 1999.
The deferred tax assets were net of a valuation allowance of $38.1 million.
Realization of the Company's net deferred tax assets is dependent upon the
Company generating sufficient taxable income in future years in appropriate tax
jurisdictions to obtain benefit from the reversal of temporary differences and
from tax credit carryforwards. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced and any such adjustments could have a material
adverse impact on the Company's effective tax rate and results of operations in
future periods.
NET INCOME (LOSS) PER SHARE
(DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/99 9/30/98 Change 9/30/99 9/30/98 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 16.1 $ 2.2 628% $ 36.2 $(78.5) *
Percentage of total revenues 7% 1% 6% (12%)
Basic net income (loss) per share $ 0.20 $ 0.03 567% $ 0.44 $(0.97) *
Diluted net income (loss) per share $ 0.19 $ 0.03 533% $ 0.43 $(0.97) *
Shares used in computing basic net
income (loss) per share 81.6 81.1 1% 81.9 80.7 1%
Shares used in computing diluted net
income (loss) per share 84.1 81.9 3% 83.7 80.7 4%
</TABLE>
- ---------------
Note - For the nine months ended September 30, 1998, the effect of outstanding
stock options is excluded from the calculation of diluted net loss per share as
their inclusion would be antidilutive.
* Not meaningful
The Company reported net income of $16.1 million and $36.2 million in the three
and nine months ended September 30, 1999, respectively, as compared to net
income of $2.2 million and a net loss of $78.5 million in the three and nine
months ended September 30,1998, respectively. The net income in the three and
nine months ended September 30, 1999 includes a pre-tax benefit from cost of
restructuring reversals of $5.6 million. The net loss in the nine months ended
September 30, 1998 includes pre-tax cost of restructuring charges of $51.7
million. The increase in net income in the three months ended September 30, 1999
compared to the three months ended September 30, 1998 is related to a reduction
in expenses associated with the 1998 Plan and increased license revenues. The
increase in net income in the nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998 is primarily related to a reduction in
expenses associated with the 1998 Plan. See "Cost of Restructuring (Reversals)."
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended Percent
9/30/99 9/30/98 Change
------- ------- -------
<S> <C> <C> <C>
Working capital $112.3 $ 70.0 60%
Cash, cash equivalents and cash investments $319.1 $220.5 45%
Net cash provided by operating activities $112.3 $ 22.0 411%
Net cash (used for)/provided by investing activities $(108.9) $ 11.5 *
Net cash used for financing activities $ 7.7 $ 14.5 (47%)
</TABLE>
- ---------------
* Not meaningful
Net cash from operating activities was $112.3 million for the nine months ended
September 30, 1999 compared to $22.0 million for the nine months ended September
30, 1998. This increase was largely attributable to the $114.8 million increase
in net income (loss) for the nine months ended September 30, 1999 as compared to
the nine months ended September 30, 1998. Depreciation and amortization charges,
which are included in the net income (loss), but do not require the use of cash,
amounted to $68.9 million for the nine months ended September 30, 1999 compared
to $81.7 million in the nine months ended September 30, 1998. This decrease in
depreciation and amortization was primarily due to the write-off of assets in
connection with the 1998 Plan. Additionally, net cash provided by operating
activities reflects an increase in accounts receivable of $34.0 million in the
nine months ended September 30, 1999 as compared to $27.5 million in the nine
months ended September 30, 1998.
Net cash used for investing activities was $108.9 million for the nine months
ended September 30, 1999 compared to net cash provided by investing activities
of $11.5 million in the nine months ended September 30, 1998. Investing
activities included capital expenditures of $21.1 million for the nine months
ended September 30, 1999 compared to $20.8 million in the same period for 1998.
Investing activities included $8.0 million of cash used for business
combinations for the nine months ended September 30, 1999 compared to $5.0
million in the nine months ended September 30, 1998, as well as capitalized
software development costs amounting to $14.2 million in the nine months ended
September 30, 1999 compared $8.1 million in the comparable period. Net cash used
for cash investments was $76.8 million for the nine months ended September 30,
1999 compared to net cash provided by the sale of cash investments of $41.5
million for the same period of 1998. Also, for the nine months ended September
30, 1999, investing activities included $11.0 million of cash provided by the
sale of real estate.
Net cash used for financing activities for the nine months ended September 30,
1999 was $7.7 million compared to net cash used for financing activities of
$14.5 million in the same period for 1998. Cash of $31.5 million was used by the
Company during the nine months ended September 30, 1999 to repurchase its common
stock. During this same period, cash of $4.7 million was generated from the
issuance of common stock and cash of $20.6 million was generated from the
issuance of treasury stock associated with the Company's stock option and
employee stock purchase plans.
19
<PAGE> 20
The Company engages in business operations around the world and is therefore
exposed to foreign currency fluctuations. As of September 30, 1999, the Company
had identifiable assets totaling $145.9 million associated with its European
operations and $64.1 million associated with its Intercontinental operations.
The Company experiences foreign exchange transaction exposure from certain
balances denominated in different currencies. The Company hedges certain of
these short-term exposures under a plan approved by the Board of Directors (see
"Qualitative and Quantitative Disclosure of Market Risk"). The Company also
experiences foreign exchange translation exposure on its net assets denominated
in different currencies. As certain of these net assets are considered by
Sybase, Inc., the U.S. parent company, to be a permanent investment in the
respective subsidiaries, the related foreign currency translation gains and
losses are reflected in an accumulated other comprehensive loss in stockholders'
equity.
Cash, cash equivalents and cash investments totaled $319.1 million at September
30, 1999, compared to $220.5 million at September 30, 1998.
During the nine months ended September 30, 1999, the Company repurchased 3.1
million shares of its common stock for $31.5 million pursuant to the Board of
Directors' authorization earlier in 1999 to repurchase up to $100.0 million of
the Company's outstanding common stock.
The Company believes that it has the financial resources needed for the
foreseeable future to meet its presently anticipated business requirements,
including capital expenditures and strategic programs.
FUTURE OPERATING RESULTS
The Company's future operating results may vary substantially from period to
period. The price of the Company's common stock will fluctuate in the future,
and an investment in the Company's common stock is subject to a variety of
significant risks, including but not limited to the specific risks identified
below. The results of operations for the three and nine months ended September
30, 1999 are not necessarily indicative of results for the year ending December
31, 1999 or any other future period. Expectations, forecasts, and projections by
the Company or others are by nature forward-looking statements, and future
results cannot be guaranteed. Forward-looking statements that were true at the
time made may ultimately prove to be incorrect or false. Inevitably, some
investors in the Company's securities will experience gains while others will
experience losses, depending on the prices at which they purchase and sell
securities. Prospective and existing investors are strongly urged to carefully
consider the various cautionary statements and risks set forth in this report.
The timing and amount of the Company's revenues from license fees are subject to
a number of factors that make estimation of revenues and operating results prior
to the end of a quarter extremely uncertain. Sybase has generally experienced a
seasonal pattern of license fees revenues decline between the fourth quarter and
the succeeding first quarter contributing to lower total revenues and operating
earnings in the first quarter compared to the prior fourth quarter. The Company
has operated historically with little or no backlog and, as a result, license
fees revenues in any quarter are dependent on orders booked and shipped in that
quarter. In addition, the timing of closing of large license agreements
increases the risk of quarter-to-quarter fluctuations and the uncertainty of
estimating quarterly operating results. The Company has experienced a pattern of
20
<PAGE> 21
recording 50 percent to 70 percent of its quarterly license fees revenues in the
third month of each quarter, with a concentration of such revenues in the last
two weeks of such third month. The Company's operating expenses are based on
projected annual and quarterly revenue levels and are incurred approximately
ratably throughout each quarter. Because the Company's operating expenses are
relatively fixed in the short term, if projected revenues are not realized in
the expected period, the Company's operating results for that period would be
adversely affected and could result in an operating loss, as occurred in the
first quarter of 1998. Failure to achieve revenues, earnings, and other
operating and financial results as forecast or anticipated by brokerage firms
and industry analysts has previously resulted in, and in the future could result
in, an immediate and substantial adverse effect on the market price of the
Company's stock. The Company may not achieve, in the future, the relatively high
rates of growth experienced by the Company in and prior to 1994 or the rates of
growth projected for the software markets in which Sybase competes.
The Company recently realigned its sales force, product teams and professional
services capabilities into four new divisions, each one focused on a key market:
Enterprise Solutions, Mobile and Embedded Computing, Internet Applications and
Business Intelligence. This reorganization took effect in January 1999. Although
such changes are intended to enhance overall revenues and profitability, they
could, in the short-term, materially and adversely affect the Company's sales
process, revenues and results of operations. There have been a number of changes
in the Company's Board of Directors and executive management. During the third
quarter of 1999, Leo T. Hindery, former president and CEO of AT&T Broadband &
Internet Services, and former president of TCI, joined the Company's Board of
Directors. Robert Epstein, a founder of the Company who had served as a director
and as the Company's Executive Vice President since November 1984, resigned from
the Company and from the Board during the third quarter. In the fall of 1998,
the Company completed an executive management transition pursuant to which John
Chen became the Company's Chief Executive Officer and Chairman of the Board. In
early 1999, Pieter Van der Vorst became the Company's Chief Financial Officer,
and Pamela George was named Vice President of Corporate Marketing. The Company's
divisional reorganization also resulted in the appointment of one general
manager for each division, and a number of other executive reassignments at the
end of 1998 and beginning of 1999. The Company will make other management and
organization changes in the future. Organizational and management changes are
intended to enhance productivity and competitiveness. However, such changes may
not produce the desired results and could materially adversely affect the
Company's results of operations.
The market for the Company's stock is highly volatile. The trading price of the
Company's common stock has fluctuated widely from 1995 through 1999 and may
continue to fluctuate in the future in response to quarterly variations in
operating and financial results, announcements of technological innovations, new
products, or customer contracts won by the Company or its competitors. Changes
in prices of the Company's or its competitors' products and services, changes in
product mix, changes in the Company's revenues and revenue growth rates for the
Company as a whole or for individual geographic areas, business units, products
or product categories, as well as other events or factors could also affect the
Company's stock prices. Statements or changes in opinions, ratings or earnings
estimates made by brokerage firms and industry analysts relating to the market
in which the Company does business, the Company's competitors, or the Company or
its products specifically, have resulted, and could in the future
21
<PAGE> 22
result, in an immediate and adverse effect on the market price of the Company's
common stock. For example, due to a variety of factors, the Company's stock
price declined significantly during the first quarter of 1996 and the first
quarter of 1998. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations that have particularly affected the market
price for many high technology companies even though such fluctuations often
have been unrelated to the operating performance of these companies.
A significant portion of the Company's revenues in recent quarters has been
derived from its international operations. In the nine months ended September
30, 1999 revenues from its international operations represented 39 percent of
the Company's total revenues. In 1998 and 1999, the Company closed subsidiaries
in Mexico, Thailand, Chile, Peru and Venezuela. In addition, there have been
several management and organizational changes within the international
operations. For example, during 1998 and 1999, the country managers in
Australia, Switzerland and Japan and the European General Manager resigned or
were replaced. International revenues, in absolute dollars and as a percentage
of total revenues, may fluctuate in part due to the growth and, in some cases,
the relative immaturity or closure of international organizations. The Company's
operations and financial results could be significantly affected by factors
associated with international operations such as changes in foreign currency
exchange rates and uncertainties relative to regional economic circumstances,
the introduction of the Euro currency unit, political instability in emerging
markets, and difficulties in staffing and managing foreign operations, as well
as other risks associated with international activities. For example, the
economic unrest and currency devaluations in Asia in late 1997 adversely
affected collection of receivables, particularly dollar denominated receivables
and the recognition of revenue since the fourth quarter of 1997.
The market for the Company's software products and services is extremely
competitive and characterized by dynamic customer demands, rapid technological
and marketplace changes, and frequent product enhancements and new product
introductions. The Company competes with a number of companies, including Oracle
Corporation, Microsoft Corporation, Informix Corporation, IBM Corporation, and
Computer Associates, Inc. Many of the Company's competitors and potential
competitors have significantly greater financial, technical, sales, and
marketing resources, and a larger installed base than the Company. In addition,
many of these competitors offer additional categories of products, such as
operating systems, that the Company does not offer and which may provide those
companies with a competitive advantage in various circumstances. New or enhanced
products, many of which have been announced and many of which are continually
introduced by existing or future competitors in the software industry, could
increase the competition faced by the Company's products from time to time and
result in greater price pressure on certain of the Company's products,
especially to the extent that market acceptance for personal computer-oriented
and Windows NT technologies increases at the expense of UNIX-based systems. A
failure by the Company to compete successfully with its existing competitors or
with new competitors could have a material adverse effect on the Company's
business and results of operations and on the market price of the Company's
common stock.
The Company's future results of operations will depend in part on its ability to
enhance existing products and to introduce new products that meet dynamic
customer requirements on a timely and cost-effective basis. Customer
requirements for products can rapidly change as a result of
22
<PAGE> 23
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 third quarter of 1999, the Company announced general availability of
Adaptive Server(R) Enterprise 12.0, complete with extended capabilities for
native Java support, tight XML integration for Internet content management, high
availability, and support for Web transaction management. The Company also
announced general availability of Enterprise Event Broker(TM), an addition to
the EnterpriseConnect(TM) family of Sybase middleware products, which enables
custom or standalone database applications to integrate with other applications
in an enterprise without requiring changes to the existing application code. In
the second quarter of 1999, the Company announced general availability of Sybase
Financial Server(TM) 1.0, an e-commerce application platform for securities
trading and electronic banking, as well as Enterprise Application Studio(TM)
3.0, a complete suite of integrated application development and deployment
products including Enterprise Application Server(TM) 3.0, PowerJ(TM) 3.0 and
PowerBuilder(R) 7.0. The Company also announced availability of four Industry
Warehouse Studios(TM) for the healthcare, telecommunications, insurance and
retail banking industries. Each product set includes packaged applications for
company-specific customization and data warehouse management. Earlier in the
year, the Company released the latest version of Adaptive Server(R) Anywhere,
which includes the UltraLite(TM) deployment option, an application-optimized
ultra-small database that resides locally on handheld devices and embedded
systems, and Mobilink two-way enterprise server synchronization technology for
the Windows CE operating system and 3Com Palm Computing platform. The creation
of certain integrated product sets is intended to enhance the ability of the
Company's partners and direct sales force to market and sell more complete
solutions to customers in a single package. While such integration is intended
to improve productivity, revenues and profitability, the elimination of the
availability of individual products subsumed within integrated product sets
could have an adverse effect on license fees and service revenues, particularly
if such product sets are not well received in the marketplace.
Sybase's results of operations will also depend increasingly on the ability of
its products to interoperate and perform well with existing and future leading,
industry-standard application software products intended to be used in
connection with relational database management systems (RDBMSs). Failure to meet
existing or future interoperability and performance requirements of certain
independent vendors marketing such applications in a timely manner has in the
past and could in the future adversely affect the market for Sybase's products.
Certain leading applications are not interoperable with Sybase RDBMSs, and
others may never be available on Sybase's RDBMSs. In addition, the Company's
application development tools, database design tools, and certain connectivity
products are designed for use with RDBMSs offered by the Company's competitors.
Vendors of non-Sybase RDBMSs and related products may become less willing in the
future to provide the Company with access to products, technical information,
and marketing and sales support. If existing and potential customers of the
Company who use non-Sybase RDBMSs refrain from purchasing such products due to
concerns that the development, quality, and support of products for non-Sybase
RDBMSs will diminish over time, the Company's business, results of operations,
and financial condition could be
23
<PAGE> 24
materially and adversely affected. The Company's products are used by many
customers to build and deploy their own custom applications. Increased reliance
on prepackaged applications and diversion of internal information technology
budgets to rectify Year 2000 compliance issues has and may in the future
continue to have the effect of reducing the internal development of custom
applications overall. Such a reduction has and may in the future continue to
have a material and adverse impact on the market for the Company's products and
the Company's business, results of operations and financial condition.
Furthermore, many products licensed by the Company contain components developed
by third parties. If the Company's products or such third party products are not
Year 2000 compliant, or cannot be determined to be compliant, market acceptance
of the Company's products could be adversely affected.
Commercial acceptance of the Company's products and services could be adversely
affected by critical or negative statements or reports by brokerage firms,
industry and financial analysts, and industry periodicals concerning the Company
and its products, business, or competitors, or by the advertising or marketing
efforts of competitors that could affect customer perception. In addition,
customer perception of Sybase and its products could be adversely affected by
financial results, particularly revenues and profitability, reported for the
1999 fiscal year or future periods, by reductions in the applicable market share
of the Company's products and by related press reports.
The Company's ability to achieve its future revenues and earnings will depend in
part on the ability of its officers and key personnel to manage growth, costs,
and expenses successfully through the implementation of appropriate management
systems and controls. Failure to effectively implement or maintain such systems
and controls could adversely affect the Company's business and results of
operations. The success of the Company also depends in part on its ability to
attract and retain qualified technical, managerial, sales, and marketing
personnel. The competition for such personnel is intense in the software
industry and, Sybase believes, has increased substantially in recent years.
There have been a number of recent changes in the Company's Board of Directors,
and in its executive management team, including the appointment of Leo Hindery
to the Board during the third quarter of 1999, the resignation of Robert Epstein
from the Board during the same period, and the appointment in 1998 of John Chen
as the Company's Chief Executive Officer and Chairman of the Board. Such changes
also included the appointment in early 1999 of Pieter Van der Vorst as Chief
Financial Officer, and Pamela George as Vice President of Corporate Marketing.
Moreover, in connection with the Company's reorganization into four operating
divisions and the appointment of one general manager for each division, a number
of executives changed responsibilities at the end of 1998 and in early 1999.
Further changes in management, the reduction in the overall number of Sybase
employees made during 1998, and the Company's financial and stock price
performance relative to companies with which Sybase competes for employees,
could affect the amount of employee turnover. The Company has experienced in
recent quarters a high rate of employee turnover. The failure to effectively
recruit, train, and retain qualified personnel or high rates of employee
turnover, particularly among consulting, engineering or sales staff, could
adversely affect the Company's product development efforts, sales of products
and services and other aspects of the Company's operations and results.
Sybase currently ships most of its products in North America from its
Emeryville, California and Massachusetts distribution facilities. Because of the
pattern of recording a high percentage of quarterly revenues within the last two
weeks of the quarter, the closure or inoperability of one or
24
<PAGE> 25
more of these facilities (or a disruption of business operations generally)
during such weeks due to natural calamity or due to a systems or power failure
could have a material adverse effect on the Company's ability to record revenues
for such quarter and, therefore, on the overall results of operations for such
quarter.
The Company has acquired a number of companies in the past. During 1998, the
Company acquired Intellidex Systems, L.L.C., a provider of meta data management
technology for deploying and managing data warehouse environments. In 1999, the
Company acquired Data Warehouse Network Limited, a provider of industry specific
data warehouse solutions and purchased debt instruments convertible into a 29.9
percent interest in Demica PLC, a provider of a wholesale banking application
using the Company's technology. The Company will likely acquire other
distributors, companies, products, or technologies in the future. The
achievement of the desired benefits of these and future acquisitions will depend
in part upon whether the integration of the acquired businesses is achieved in
an efficient and effective manner. The successful combination of businesses will
require, among other things, integration of the companies' related product
offerings and coordination of their sales, marketing, and research and
development efforts. The difficulties of such coordination may be increased by
the geographic distance between separate organizations. The Company may be
unable to integrate effectively these or future acquired businesses and may not
obtain the anticipated or desired benefits of such acquisitions. Such
acquisitions may result in costs, liabilities, or additional expenses that could
adversely affect the Company's results of operations and financial condition. In
addition, acquisitions or changes in business or market conditions may cause the
Company to revise its plans, which could result in unplanned expenses or a loss
of anticipated benefits from past investments.
During 1998, the Company incurred restructuring charges of $74.2 million. The
Company does not currently anticipate that it will incur additional
restructuring charges in 1999 and recorded cost of restructuring reversals of
$5.6 million in the second quarter of 1999. However, as this is a
forward-looking statement, future actual results may differ based on the actual
results of operations experienced in 1999 and the various factors described
above that affect future results.
Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position No. 97-2, "Software
Revenue Recognition" (SOP 97-2), which supercedes SOP 91-1 and which prohibits
the restatement of prior financial statements. SOP 97-2 addresses software
revenue recognition matters primarily from a conceptual level and detailed
implementation guidelines have not been issued. In March 1998, the AICPA issued
Statement of Position No. 98-4, "Deferral of the Effective Date of a Provision
of SOP 97-2, Software Revenue Recognition", which defers for one year the
application of certain provisions of SOP 97-2. These provisions limit what is
considered vendor-specific objective evidence of the fair value of the various
elements in a multiple-element arrangement. All other provisions of SOP 97-2
remain in effect. These and future changes to, and interpretations of,
accounting standards and rules could adversely affect the amount and timing of
recognition of revenue.
25
<PAGE> 26
YEAR 2000
The Company is aware of and is addressing the issues associated with the
programming code in existing computer systems as the year 2000 approaches. The
"Year 2000" issue is pervasive and complex, as many computer systems will be
affected in some way by the rollover of the two-digit year value to 00. Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail. The "Year 2000" issue creates potential risk for the
Company from unforeseen problems in its own computer systems, from third parties
with whom the Company deals on financial transactions worldwide and in its own
software products licensed to customers. Failures of the Company's and/or third
parties' computer systems could have a material impact on the Company's ability
to conduct its business. Not all products previously licensed by the Company
meet current standards for Year 2000 compliance, and many of these products are
still in use by customers. Complex software products, such as the type licensed
by the Company and its competitors, generally are not completely free from
"bugs" and other defects. The existence of such "bugs" may give rise to legal
claims against the Company, notwithstanding standard provisions in the Company's
license agreements with its customers disclaiming express and implied warranties
against such errors. Such legal claims or claims that products previously
licensed by the Company are not Year 2000 compliant could have a material
adverse impact on the Company's business and results of operations.
As of March 1999, the Company completed its assessment of all of its critical
worldwide infrastructure systems (e.g., computer and telephone systems) and
business systems (e.g., revenue, sales and marketing and finance functions) and
also completed much of the remedial work necessary to make these systems Year
2000 compliant. The Company has substantially completed installation of all
upgrade and replacement solutions necessary to make its mission-critical
applications, infrastructure systems and business systems Year 2000 compliant.
The Company defines "mission-critical" as those applications and systems which,
if rendered non-functional, would likely result in a disruption of the Company's
normal business lasting three hours or more. 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. The Company has received written certification from all
partners and outside vendors providing mission-critical services and systems
that such services and systems are Year 2000 compliant. Notwithstanding the
foregoing, there is no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and that they will not have
an adverse effect on the Company's systems. As such, the Company has developed
detailed contingency plans for all of its mission-critical 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.
26
<PAGE> 27
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
The following discussion about the Company's risk management activities includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements for the reasons described under the caption "Future Operating
Results."
As a global concern, the Company faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on the Company's
financial position and results of operations. Historically, the Company's
primary exposures have related to nondollar-denominated sales and expenses in
Europe, Asia Pacific, including Japan and Australia, and Latin America. In order
to reduce the effect of foreign currency fluctuations, the Company hedges its
exposure on certain transactional balances that are denominated in foreign
currencies through the use of foreign currency forward exchange contracts. For
the most part, these exposures consist of intercompany accounts receivable owed
to the Company as a result of local sales of software licenses by the Company's
international subsidiaries. The majority of these exposures are denominated in
European and Asia Pacific currencies, primarily the Euro and Hong Kong dollar.
These forward exchange contracts are recorded at fair value and are short-term
in nature (usually 30 days or less). At September 30, 1999, the Company had
forward exchange contracts to exchange various foreign currencies for U.S.
dollars, Euro and Hong Kong dollars in the amounts of $5.0 million, $8.2 million
and $0.9 million, respectively, and to exchange U.S. dollars and Euro dollars
into various foreign currencies in the amounts of $33.8 million and $11.1
million, respectively. Neither the cost nor the fair value of these foreign
currency forward exchange contracts was material at September 30, 1999. One
major U.S. multinational bank is a counter party to substantially all of these
contracts.
The Company maintains an investment portfolio holding of various issuers, types
and maturities. These securities are generally classified as available for sale,
and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of stockholders'
equity, net of tax, if material. Unrealized gains and losses at September 30,
1999 were not material. The Company's cash, cash equivalent and short term cash
investment balances of $275.2 million at September 30, 1999 consisted primarily
of short-term money market instruments with approximately 60 percent having
maturity dates of less than 180 days, and 40 percent having maturities of 180
days to one year. The Company's long term investments of $43.8 million at
September 30, 1999 primarily consists of commercial paper, bonds and mid-term
notes that have maturity dates of more than one year but less than two years.
The Company does not believe its exposure to interest rate risk is material
given the short-term nature of its investment portfolio.
27
<PAGE> 28
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.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 12, 1999 SYBASE, INC.
By /s/ PIETER VAN DER VORST
------------------------------------------
Pieter Van der Vorst
Vice President and Chief Financial Officer
(Principal Financial Officer)
By /s/ MARTIN J. HEALY
------------------------------------------
Martin J. Healy
Vice President and Corporate Controller
(Principal Accounting Officer)
29
<PAGE> 30
EXHIBIT INDEX TO SYBASE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SYBASE INC. AS OF SEPTEMBER 30, 1999 AND
FOR THE YEARS THEN ENDED.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 217,344
<SECURITIES> 57,895
<RECEIVABLES> 197,798
<ALLOWANCES> (30,313)
<INVENTORY> 0
<CURRENT-ASSETS> 476,090
<PP&E> 343,835
<DEPRECIATION> (272,295)
<TOTAL-ASSETS> 696,482
<CURRENT-LIABILITIES> 363,795
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 421,204
<TOTAL-LIABILITY-AND-EQUITY> 696,482
<SALES> 298,189
<TOTAL-REVENUES> 634,558
<CGS> 29,992
<TOTAL-COSTS> 162,032
<OTHER-EXPENSES> 107,387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> 59,395
<INCOME-TAX> 23,164
<INCOME-CONTINUING> 36,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,231
<EPS-BASIC> 0.44<F1>
<EPS-DILUTED> 0.43
<FN>
<F1>REFLECTS BASIC EPS ACCORDING TO SFAS 128, EARNINGS PER SHARE
</FN>
</TABLE>
