<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File number 0-19395
SYBASE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-2951005
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6475 Christie Avenue, Emeryville, CA 94608
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (510) 922-3500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On June 30, 1999, 81,738,086 shares of the Registrant's Common Stock, $.001 par
value, were outstanding.
<PAGE> 2
SYBASE, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 1999 and 3
December 31, 1998
Condensed Consolidated Statements of Operations for the three months and 4
six months ended June 30, 1999 and June 30, 1998
Condensed Consolidated Statements of Cash Flows for the six months 5
ended June 30, 1999 and June 30, 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
Item 3: Quantitative and Qualitative Disclosure of Market Risk 26
Part II: Other Information
Item 1: Legal Proceedings 27
Item 4: Submission of Matters to a Vote of Security Holders 27
Item 6: Exhibits and Reports on Form 8-K 28
Signatures 29
Exhibit Index 30
</TABLE>
2
<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands, except share and per share data) 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 188,747 $ 224,665
Short-term investments 60,726 23,967
------------ ------------
Total cash, cash equivalents and short-term
investments 249,473 248,632
Accounts receivable, net 162,001 199,303
Deferred income taxes 20,967 20,903
Other current assets 11,285 8,862
------------ ------------
Total current assets 443,726 477,700
Long-term investments 49,856 981
Property, equipment and improvements, net 81,711 101,433
Deferred income taxes 20,180 20,152
Capitalized software, net 35,974 35,773
Other assets 48,464 60,565
------------ ------------
Total assets $ 679,911 $ 696,604
============ ============
Current liabilities:
Accounts payable $ 9,239 $ 12,747
Accrued compensation and related expenses 46,316 49,061
Accrued income taxes 35,091 26,736
Other accrued liabilities 92,733 112,856
Deferred revenue 178,993 190,631
Other current liabilities 1,271 1,490
------------ ------------
Total current liabilities 363,643 393,521
Other liabilities 2,098 2,011
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $0.001 par value, 8,000,000
shares authorized; none issued or outstanding -- --
Common stock, $0.001 par value, 200,000,000
shares authorized; 82,561,537 shares issued and
81,738,086 outstanding (1998-81,769,334 shares
issued and 81,169,334 outstanding) 83 82
Additional paid-in capital 421,204 416,501
Accumulated deficit (83,422) (102,471)
Accumulated other comprehensive loss (15,649) (9,702)
Cost of 823,451 shares of treasury stock
(1998-600,000 shares) (8,046) (3,338)
------------ ------------
Total stockholders' equity 314,170 301,072
------------ ------------
Total liabilities and stockholders' equity $ 679,911 $ 696,604
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
(In thousands, except per share data) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 95,703 $ 105,920 $ 193,973 $ 201,924
Services 114,484 111,950 224,482 222,763
--------- --------- --------- ---------
Total revenues 210,187 217,870 418,455 424,687
Costs and expenses:
Cost of license fees 8,492 8,934 20,788 19,032
Cost of services 52,110 56,064 106,152 118,846
Sales and marketing 80,884 103,412 162,169 211,846
Product development and engineering 35,385 33,260 72,563 70,393
General and administrative 17,736 14,588 34,787 31,013
Cost of restructuring (reversals) (5,619) -- (5,619) 51,694
--------- --------- --------- ---------
Total costs and expenses 188,988 216,258 390,840 502,824
--------- --------- --------- ---------
Operating income (loss) 21,199 1,612 27,615 (78,137)
Interest income 3,112 2,040 6,399 4,742
Interest expense and other, net 469 298 222 (329)
--------- --------- --------- ---------
Income (loss) before income taxes 24,780 3,950 34,236 (73,724)
Provision for income taxes 10,480 3,500 14,061 7,020
--------- --------- --------- ---------
Net income (loss) $ 14,300 $ 450 $ 20,175 $ (80,744)
========= ========= ========= =========
Basic net income (loss) per share $ 0.17 $ 0.01 $ 0.25 $ (1.00)
========= ========= ========= =========
Shares used in computing basic net income
(loss) per share 82,191 80,833 81,986 80,552
========= ========= ========= =========
Diluted net income (loss) per share $ 0.17 $ 0.01 $ 0.24 $ (1.00)
========= ========= ========= =========
Shares used in computing diluted net income
(loss) per share 83,776 80,854 83,381 80,552
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) Six Months Ended
June 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) 20,175 (80,744)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 47,053 56,255
Write off of assets in restructuring (reversals) (390) 23,126
Loss on disposal of assets 2,899 --
Deferred income taxes (92) (207)
Changes in assets and liabilities:
Accounts receivable 35,494 21,773
Other current assets (3,470) (277)
Accounts payable (3,508) (9,696)
Accrued compensation and related expenses (2,745) 3,554
Accrued income taxes 8,355 (2,976)
Other accrued liabilities (16,978) (4,183)
Deferred revenues (11,638) (1,940)
Other 52 119
--------- ---------
Net cash provided by operating activities 75,207 4,804
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash deposits -- (13,276)
Purchases of available-for-sale cash investments (103,007) (20,137)
Maturities of available-for-sale cash investments 9,843 18,730
Sales of available-for-sale cash investments 7,530 25,131
Business combinations, net of cash acquired (8,047) (5,000)
Purchases of property, equipment and improvements (8,480) (13,721)
Sale of property, equipment and improvements -- 6,808
Capitalized software development costs (8,631) (7,963)
Decrease in other assets 6,961 1,225
--------- ---------
Net cash used for investing activities (103,831) (8,203)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in other current liabilities (182) (21,545)
Proceeds from issuance of common stock 4,703 7,933
Proceeds from the sale of treasury stock 11,118 --
Purchases of treasury stock (16,952) (431)
--------- ---------
Net cash used for financing activities (1,313) (14,043)
Effect of exchange rate changes on cash (5,981) (6,734)
--------- ---------
Net decrease in cash and cash equivalents (35,918) (24,176)
Cash and cash equivalents, end of period 188,747 164,700
Cash investments, end of period 110,582 33,537
--------- ---------
Total cash, cash equivalents, and cash
investments, end of period $ 299,329 $ 198,237
========= =========
Supplemental disclosures:
Interest paid $ 44 $ 537
========= =========
Income taxes paid $ 7,362 $ 8,593
========= =========
</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 six months ended June 30, 1999
are not necessarily indicative of results for the entire fiscal year ending
December 31, 1999.
2. Business Combinations. In February 1999, the Company acquired Data Warehouse
Network (DWN), an Ireland-based, privately held provider of packaged,
industry-specific business intelligence applications. Under terms of the
acquisition agreement, the Company paid $2,723,000 in cash for certain assets
and assumed certain liabilities of DWN. In addition, pursuant to the terms of
the agreement, the Company is obligated to make contingent payments based on
certain agreed-upon performance criteria. The aggregate maximum additional
amount payable over a three-year period is $5,336,000. The transaction was
accounted for as a purchase. Substantially all of the amount paid was allocated
to purchased software and intangible assets. The results of operations of DWN
have not been material in relation to those of the Company and are included in
the consolidated results of operations for periods subsequent to the acquisition
date.
In March 1999, the Company paid $5,324,000 for Convertible Secured Promissory
Notes due December 31, 2002 issued by Demica PLC (Demica), a provider of a
wholesale banking application using the Company's technology. The notes bear
interest at 8 percent per annum and are convertible into 29.9 percent of the
share capital of Demica. The Company accounts for its investment in this entity
under the equity method of accounting.
On February 2, 1998, Sybase acquired Intellidex Systems, L.L.C. (Intellidex), a
provider of meta data management technology for deploying and managing data
warehouse environments. Under terms of the acquisition agreement, Sybase paid
$5,000,000 in cash for certain assets and assumed certain liabilities of
Intellidex. Of the amount paid, $3,737,000 was allocated to purchased software
and the balance of $1,263,000 was allocated to other intangible assets. In
addition, pursuant to the terms of the agreement, Sybase is obligated to make
contingent payments based on certain agreed upon performance criteria. The
aggregate maximum additional amount payable
6
<PAGE> 7
SYBASE, INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
over a three-year period is $9,166,666. The transaction was accounted for as a
purchase. The results of operations of Intellidex have not been material in
relation to those of the Company and are included in the consolidated results of
operations for periods subsequent to the acquisition date.
3. Costs of Restructuring (Reversals). In February 1998, the Company announced
and began to implement a restructuring plan aimed at reducing costs, restoring
profitability to operations and focusing the Company's products around its core
businesses. This restructuring activity consisted primarily of terminating
employees, terminating certain product lines, vacating certain facilities and
canceling real estate leases as a result of the employee terminations. In the
six months ended June 30, 1999, the Company reversed by credit to operating
expenses $5.6 million of restructuring costs related to the 1998 restructuring
activity. The significant components included: (i) approximately $1.8 million
for termination payments to employees who were terminated as part of the 1998
restructuring activity but left the Company prior to their exit date, and
therefore, did not qualify for termination benefits; and (ii) approximately $3.1
million related to lease cancellations and commitments where the Company was
able to sublet certain closed facilities earlier than anticipated.
The following table summarizes the activity related to the restructuring
liability for the six months ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Accrued
Amounts Liabilities
Accrued paid or at
Liabilities at written Amounts June 30,
December 31, 1998 off reversed 1999
----------------- ------- -------- ----
<S> <C> <C> <C> <C>
Termination payments to employees and
other related costs $12,483 $ 9,574 $ 1,810 $ 1,099
Lease cancellations and commitments 9,538 2,114 3,105 4,319
Costs related to closing of
subsidiaries, including write-off of
goodwill 2,730 2,730 -- --
Other 2,567 620 704 1,243
------- ------- ------- -------
$27,318 $15,038 $ 5,619 $ 6,661
======= ======= ======= =======
</TABLE>
The Company expects that the remaining $6.7 million accrued liability balance at
June 30, 1999 will be expended over the next six months.
4. Net income (loss) per share. Shares used in computing basic and diluted net
income (loss) per share are based on the weighted average shares outstanding in
each period, excluding treasury stock. Basic net income (loss) per share
excludes any dilutive effects of stock options. Diluted net income (loss) per
share includes the dilutive effect of the assumed exercise of stock options
using the treasury stock method. The following table shows the computation of
basic and diluted net income (loss) per share:
7
<PAGE> 8
SYBASE, INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
6/30/99 6/30/98 6/30/99 6/30/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 14,300 $ 450 $ 20,175 $(80,744)
Shares used in computing basic
net income (loss) per share 82,191 80,833 81,986 80,552
Effect of dilutive securities - stock options 1,585 21 1,395 -(a)
-------- -------- -------- --------
Shares used in computing diluted
net income (loss) per share 83,776 80,854 83,381 80,552
Basic net income (loss) per share $ 0.17 $ 0.01 $ 0.25 $ (1.00)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.17 $ 0.01 $ 0.24 $ (1.00)
======== ======== ======== ========
</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>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
(In thousands) June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 14,300 $ 450 $ 20,175 $(80,744)
Foreign currency translation losses (3,903) (82) (5,947) (1,997)
-------- -------- -------- --------
Comprehensive income (loss) $ 10,397 $ 368 $ 14,228 $(82,741)
======== ======== ======== ========
</TABLE>
6. New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (Statement
133). Statement 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. In June 1999, the FASB issued Statement No.137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," which amended Statement No. 133 by deferring
the effective date to the fiscal year beginning after June 30, 2000. The Company
has not determined the effect, if any, that adoption will have on its financial
position or results of operations.
8
<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 financial results. However, full implementation
guidelines for these standards have not been issued. Once available, the current
revenue recognition accounting practices may need to change and such changes
could affect the Company's future revenues and results of operations.
In December 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions" (SOP 98-9). SOP 98-9 amends
SOP 98-4 to extend the deferral of the application of certain passages of SOP
97-2 provided by SOP 98-4 through fiscal years beginning after March 15, 1999.
The Company does not expect a material impact from the final adoption of SOP
98-9 on its future revenues and results of operations.
7. Segment Information. The Company helps businesses integrate, manage and
deliver applications, content and data anywhere they are needed. The Company's
software products, combined with its professional services and partner
technologies, provide a comprehensive platform for delivering integrated
solutions to businesses. The Company is organized into four separate business
divisions, each of which maintains financial accountability for its operating
results, dedicated product development and engineering, sales and product
marketing, partner relationship management and customer support teams.
The Enterprise Solutions Division (ESD) delivers products, technical support and
professional services required by businesses for developing and maintaining
operational systems. The Mobile and Embedded Computing Division (MEC) provides
solutions which enable customers to synchronize data seamlessly across their
mobile business systems, including laptops, handheld computing devices,
pagers, and intelligent appliances. The Internet Applications Division (IAD)
delivers a combination of technologies used in the development and deployment of
complex internet-enabled applications. The Business Intelligence Division (BID)
delivers database management systems, warehouse design tools and central meta
data management facilities.
The Company reports its ESD, MEC, IAD and BID divisions as reportable segments
in accordance with Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (Statement
131). For the three months ended March 31, 1999, the results of the ESD and BID
divisions were aggregated in accordance with the provisions of Statement 131. As
a result of the expansion of BID's activities
9
<PAGE> 10
SYBASE, INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and infrastructure, the division no longer satisfies the aggregation criteria
set forth in Statement 131 and, therefore, is reported separately for the three
and six months ended June 30, 1999.
The Company has not presented the reportable segments discussed above for the
three and six months ended June 30, 1998, since these segments were not
established until 1999, and it would be impractical to restate prior periods on
this basis. The Company had two reportable segments in 1998: license fees and
professional services. The Company's statements of operations disclose the
available data for the two reportable segments identified above for the three
and six months ended June 30, 1999 and 1998.
In 1999, the Company's Chief Operating Decision Maker (CODM), which is the
President and Chief Executive Officer, evaluates performance based upon a
measure of segment operating profit or loss which includes an allocation of
common expenses, but excludes certain unallocated expenses. Segment revenue
includes transactions between the segments. These revenues are transferred to
the applicable segments less amounts retained which are intended to reflect the
costs incurred by the transferring segment. Allocated common costs and expenses
are allocated on measurable drivers of expense. Unallocated expenses represent
corporate expenditures that are not specifically allocated to the segments. The
Company's CODM does not view segment results below operating profit (loss), and
therefore, interest income, interest expense and other, net and the provision
for income taxes are not broken out by segment. The Company does not account for
or report to the CODM its assets or capital expenditures by segment.
A summary of the segment financial information reported to the CODM for the
three months ended June 30, 1999 is presented below:
<TABLE>
<CAPTION>
(In thousands) Consolidated
ESD IAD MEC BID Elimination Total
--- --- --- --- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees $ 64,917 $ 17,103 $ 9,847 $ 3,836 $ -- $ 95,703
Services 114,278 -- -- 206 -- 114,484
-------- -------- -------- -------- -------- --------
Direct revenues from external
customers 179,195 17,103 9,847 4,042 -- 210,187
Intersegment revenues 477 7,494 8,375 2,473 (18,819) --
-------- -------- -------- -------- -------- --------
Total revenues 179,672 24,597 18,222 6,515 (18,819) 210,187
Total allocated costs and
expenses 159,253 21,443 13,317 7,764 (18,819) 182,958
Operating income (loss) before
unallocated expenses 20,419 3,154 4,905 (1,249) -- 27,229
Unallocated expenses 6,030
--------
Operating income 21,199
Interest income and expense, net 3,581
--------
Income before income taxes 24,780
</TABLE>
10
<PAGE> 11
SYBASE, INC.
--------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the segment financial information reported to the CODM for the six
months ended June 30, 1999 is presented below:
<TABLE>
<CAPTION>
(In thousands) Consolidated
ESD IAD MEC BID Elimination Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees $139,139 $ 32,463 $ 18,409 $ 3,962 $ -- $193,973
Services 224,097 -- -- 385 -- 224,482
-------- -------- -------- -------- -------- --------
Direct revenues from external customers 363,236 32,463 18,409 4,347 -- 418,455
Intersegment revenues 777 15,690 15,529 5,350 (37,346) --
-------- -------- -------- -------- -------- --------
Total revenues 364,013 48,153 33,938 9,697 (37,346) 418,455
Total allocated costs and expenses 327,927 41,183 25,888 15,960 (37,346) 373,612
-------- -------- -------- -------- -------- --------
Operating income (loss) before
unallocated expenses 36,086 6,970 8,050 (6,263) -- 44,843
Unallocated expenses 17,228
--------
Operating income 27,615
Interest income and expense, net 6,621
--------
Income before income taxes 34,236
</TABLE>
8. Subsequent Event. On July 20, 1999, the Board of Directors authorized the
repurchase of up to an additional $75 million of the Company's outstanding
common stock. The plan continued a $25 million repurchase program authorized by
the Board of Directors in 1998 to allow the Company to use available cash
balances to buy back its shares in open market transactions from time to time,
subject to price and market conditions. As of June 30, 1999, the Company held a
balance of 823,451 shares which had been repurchased under the program.
9. Litigation. Following the Company's announcement on April 3, 1995 of its
preliminary results for the first fiscal quarter ended March 31, 1995, several
class action lawsuits were filed against the Company and certain of its officers
in the Northern California District Court. On April 21, 1999, the Company and
all the individual defendants reached an agreement in principle with plaintiffs
to settle the case for $14,800,000, of which $1,500,000 is to be paid by the
Company and the remainder of which is to be paid by the Company's insurers. The
Company has paid its share of the settlement to plaintiffs' escrow fund, and
intends to carry out the terms of the settlement agreement. On April 29, 1999,
during the time in which the settlement agreement was being formally documented,
the District Court granted summary judgment in favor of the Company and all the
individual defendants. Plaintiffs have appealed the judgment to the United
States Court of Appeals, Ninth Circuit.
11
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/99 6/30/98 Change 6/30/99 6/30/98 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
License fees $ 95.7 $105.9 (10%) $194.0 $201.9 (4%)
Percentage of total revenues 46% 49% 46% 48%
Services $114.5 $112.0 2% $224.5 $222.8 1%
Percentage of total revenues 54% 51% 54% 52%
Total revenues $210.2 $217.9 (4%) $418.5 $424.7 (1%)
</TABLE>
Total revenues for the three months ended June 30, 1999 decreased 4 percent to
$210.2 million as compared to $217.9 million for the three months ended June 30,
1998. For the six months ended June 30, 1999, total revenues decreased 1 percent
to $418.5 million as compared to $424.7 million for the six months ended June
30, 1998.
License fees revenues decreased 10% to $95.7 million in the three months ended
June 30, 1999, as compared to $105.9 million for the three months ended June
30,1998. For the six months ended June 30,1999, license fees revenues decreased
4% to $194.0 million as compared to $201.9 million for the six months ended June
30,1998. The Company believes the decrease in license fees revenues is primarily
due to companies continuing to reallocate available technology resources toward
"Year 2000" compliance solutions. The products that contributed to the decline
in license fees revenues were primarily enterprise server database products.
Whether the decline in license fees revenues continues will depend, in part, on
the Company's ability to enhance existing products and to introduce, on a timely
basis, new products that meet customer requirements. See "Future Operating
Results."
Services revenues increased 2 percent to $114.5 million for the three months
ended June 30, 1999 as compared to $112.0 million in the three months ended June
30, 1998. For the six months ended June 30, 1999, services revenues increased 1%
to $224.5 million as compared to $222.8 million in the six months ended June 30,
1998. Services revenues consist primarily of consulting, education and other
services related to the development and deployment of applications using the
Company's software products, and product support and maintenance fees. Services
revenues as a percentage of total revenues increased to 54 percent for the three
and six months ended June 30, 1999 as compared to 51 percent and 52 percent for
the three and six months ended June 30, 1998, respectively.
12
<PAGE> 13
GEOGRAPHICAL REVENUES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/99 6/30/98 Change 6/30/99 6/30/98 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
North American $125.8 $125.8 0% $252.8 $246.9 2%
Percentage of total revenues 60% 58% 60% 58%
International
European $ 57.1 $ 64.1 (11%) $113.9 $127.0 (10%)
Percentage of total revenues 27% 29% 27% 30%
Intercontinental $ 27.3 $ 28.0 (3%) $ 51.8 $ 50.8 2%
Percentage of total revenues 13% 13% 13% 12%
Total International $ 84.4 $ 92.1 (8%) $165.7 $177.8 (7%)
Percentage of total revenues 40% 42% 40% 42%
Total revenues $210.2 $217.9 (4%) $418.5 $424.7 (1%)
</TABLE>
North American revenues (United States, Canada and Mexico) were $125.8 million
in both the three months ended June 30, 1999 and the three months ended June 30,
1998. North American revenues increased 2% to $252.8 million in the six months
ended June 30, 1999 as compared to $246.9 million for the six months ended June
30, 1998. The increase during the six month period was due to higher license
fees revenue in North America. International revenues decreased 8 percent and 7
percent for the three and six months ended June 30, 1999, respectively, to $84.4
million and $165.7 million, from $92.1 million and $177.8 million, respectively,
for both comparable periods of 1998. European revenues decreased 11 percent and
10 percent for the three and six months ended June 30, 1999 compared to the same
periods of 1998. The decrease in European revenues was primarily due to lower
license fees revenues. Intercontinental revenues (Japan, Asia Pacific and South
America) decreased 3 percent for the three months ended June 30, 1999 as
compared to the three months ended June 30, 1998. This decrease was primarily
related to lower license fees revenues. Intercontinental revenues increased 2
percent in the six months ended June 30,1999 as compared to the same period of
1998. This increase was primarily due to higher services revenues.
International revenues were 40 percent of total revenues for the three and six
months ended June 30, 1999, compared to 42 percent for the three and six months
ended June 30, 1998.
Although the Company takes into account changes in exchange rates over time in
its pricing strategy, the Company's business and results of operations could be
materially and adversely affected by unanticipated fluctuations in foreign
currency exchange rates. Changes in foreign currency exchange rates, the
strength of local economies, and the general volatility of worldwide software
markets may result in a higher or lower proportion of foreign revenues as a
percentage of total revenues in the future.
13
<PAGE> 14
COSTS AND EXPENSES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/99 6/30/98 Change 6/30/99 6/30/98 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Cost of license fees $ 8.5 $ 8.9 (5%) $ 20.8 $ 19.0 9%
Percentage of license fees revenues 9% 8% 11% 9%
Cost of services $ 52.1 $ 56.1 (7%) $ 106.2 $ 118.8 (11%)
Percentage of services revenues 46% 50% 47% 53%
Sales and marketing $ 80.9 $ 103.4 (22%) $ 162.2 $ 211.8 (23%)
Percentage of total revenues 38% 47% 39% 50%
Product development and
Engineering $ 35.4 $ 33.3 6% $ 72.6 $ 70.4 3%
Percentage of total revenues 17% 15% 17% 17%
General and administrative $ 17.7 $ 14.6 22% $ 34.8 $ 31.0 12%
Percentage of total revenues 8% 7% 8% 7%
Cost of restructuring (reversals) $ (5.6) -- -- $ (5.6) $ 51.7 *
Percentage of total revenues (3%) -- -- (1%) 12% --
</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 $8.5
million and $20.8 million for the three and six months ended June 30, 1999,
respectively, as compared to $8.9 million and $19.0 million for the same periods
in 1998. These costs were 9 percent and 11 percent of license fees revenue for
the three and six months ended June 30, 1999, respectively, as compared to 8
percent and 9 percent for the same periods in 1998. The increase in the cost of
license fees in the six months ended June 30, 1999 as compared to the six months
ended June 30, 1998 was primarily due to an increase in royalties payable to
third parties. Amortization of purchased software and capitalized software costs
included in cost of license fees was $4.9 million and $9.6 million for the three
and six months ended June 30, 1999, respectively, as compared to $4.9 million
and $9.8 million for the three and six months ended June 30, 1998.
Cost of Services. Cost of services consists primarily of maintenance, consulting
and education expenses and, to a lesser degree, services-related product costs
(media and documentation). These costs were $52.1 million and $106.2 million in
the three and six months ended June 30, 1999, respectively, as compared to $56.1
million and $118.8 million for the comparable periods of 1998. These changes
represent decreases of 7 percent and 11 percent for the three and six months
ended June 30, 1999 as compared to the same periods of 1998. These costs
decreased as a percentage of services revenues to 46 percent and 47 percent for
the three and six months ended June 30, 1999, respectively, from 50 percent and
53 percent for the same periods in 1998. The decrease in cost of services in
absolute dollars and as a percentage of services revenues for
14
<PAGE> 15
both comparable periods is primarily due to a decrease in salaries, facility
costs including rent, and depreciation as a result of the Company's
restructuring plan initiated in 1998.
Sales and Marketing. Sales and marketing expenses were $80.9 million and $162.2
million for the three and six months ended June 30, 1999, respectively, compared
to $103.4 million and $211.8 million for the same periods in 1998. These changes
represent decreases of 22 percent and 23 percent for the three and six months
ended June 30, 1999 compared to the same periods of 1998. These costs decreased
as a percentage of total revenues to 38 percent and 39 percent in the three and
six months ended June 30, 1999, respectively, as compared to 47 percent and 50
percent for the same periods of 1998. The decrease in sales and marketing
expenses in absolute dollars and as a percentage of total revenues for both
comparable periods is primarily due to a decrease in salaries, facility costs
including rent, and depreciation as a result of the Company's restructuring plan
initiated in 1998. The decrease in sales and marketing was partially offset by
an increase in allocated common costs. The Company allocates certain common
costs including legal, litigation, accounting, human resources, external
consulting, employee benefits, and facilities costs to sales and marketing,
product development and engineering, and general and administrative expenses.
Product Development and Engineering. Product development and engineering
expenses (net of capitalized software development costs) were $35.4 million and
$72.6 million in the three and six months ended June 30, 1999, respectively, as
compared to $33.3 million and $70.4 million in the same periods of 1998. These
costs as a percentage of total revenues increased to 17 percent in the three and
six months ended June 30, 1999, as compared to 15 percent and 17 percent in the
three and six months ended June 30, 1998, respectively. The increase in product
development and engineering expenses in absolute dollars and as a percentage of
total revenues for both comparable periods is primarily due to an increase in
allocated common costs.
The Company capitalized approximately $4.5 million and $8.6 million of software
development costs in the three and six months ended June 30, 1999 as compared to
$4.1 million and $7.6 million in the three and six months ended June 30, 1998.
In the six months ended June 30, 1999, capitalized software costs included costs
incurred for the development of Adaptive Server(R) Enterprise 12.0, Enterprise
Application Studio(TM) 3.0, Jaguar CTS(TM) 3.0 and PowerDesigner(R) 7.0. The
Company believes that product development and engineering expenditures are
essential to technology and product leadership and expects product development
and engineering expenditures to continue to be significant, both in absolute
dollars and as a percentage of total revenues.
General and Administrative. General and administrative expenses were $17.7
million and $34.8 million in the three and six months ended June 30, 1999,
respectively, as compared to $14.6 million and $31.0 million in the same periods
of 1998. General and administrative expenses represented 8 percent of total
revenues in the three and six months ended June 30, 1999, as compared to 7
percent of total revenues in the three and six months ended June 30, 1998. The
increase in general and administrative expenses for both comparable periods is
primarily due to an increase in allocated common costs.
Cost of Restructuring (Reversals). The Company incurred restructuring charges in
the amount of $51.7 million and $22.5 million in the first and fourth quarters
of 1998, respectively. As a result of a
15
<PAGE> 16
substantial loss incurred during 1997, the Company formulated a restructuring
plan, which was instituted in February 1998 ("the 1998 Plan"). The 1998 Plan was
intended to significantly reduce annual operating expenses by realigning the
Company's resources around its core product initiatives. Under the 1998 Plan,
the Company estimated restructuring charges of $70 million to be incurred during
1998. The 1998 Plan included the termination of approximately 1,100 employees,
the termination of certain product offerings including Sybase MPP(TM), certain
APT products, dbQueue(TM), Web. SQL(TM), Lego Rom and Powerbuilder(R) for Mac,
the consolidation or closure of more than 30 facilities worldwide, and the
closure of subsidiaries in Thailand, Peru, Chile, Venezuela and Mexico. The
Company believes the restructuring actions taken achieved the desired result as
the Company has been able to reduce its overall cost structure.
In the six months ended June 30, 1999, the Company reversed by credit to
operating expenses $5.6 million of restructuring costs related to the 1998 Plan.
The significant components included: (i) approximately $1.8 million for
termination payments to employees who were terminated as part of the 1998 Plan
but left the Company prior to their exit date, and therefore, did not qualify
for termination benefits; and (ii) approximately $3.1 million related to lease
cancellations and commitments where the Company was able to sublet certain
closed facilities earlier than anticipated.
The following table summarizes the activity related to the restructuring
liability for the six months ended June 30, 1999:
<TABLE>
<CAPTION>
Accrued
(IN MILLIONS) Accrued Amounts Liabilities at
Liabilities at paid or Amounts June 30,
December 31, 1998 written off reversed 1999
----------------- ----------- -------- ----
<S> <C> <C> <C> <C>
Termination payments to employees and other related costs $12,483 $ 9,574 $ 1,810 $ 1,099
Lease cancellations and commitments 9,538 2,114 3,105 4,319
Costs related to closing of subsidiaries, including
write-off of goodwill 2,730 2,730 -- --
Other 2,567 620 704 1,243
------- ------- ------- -------
$27,318 $15,038 $ 5,619 $ 6,661
======= ======= ======= =======
</TABLE>
The Company expects that the remaining $6.7 million accrued liability balance at
June 30, 1999 will be expended over the next six months.
OPERATING INCOME (LOSS)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/99 6/30/98 Change 6/30/99 6/30/98 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Operating income (loss) $ 21.2 $ 1.6 * $ 27.6 ($ 78.1) *
Percentage of total revenues 10% 1% 7% (18%)
Operating income (loss) exclusive
of cost of restructuring (reversals) $ 15.6 $ 1.6 * $ 22.0 ($ 26.5) *
Percentage of total revenues 7% 1% 5% (6%)
</TABLE>
- ----------
* Not meaningful
16
<PAGE> 17
Operating income was $15.6 million and $22.0 million for the three and six
months ended June 30, 1999, respectively (exclusive of cost of restructuring
reversals of $5.6 million), compared to operating income of $1.6 million and an
operating loss of $26.5 million (exclusive of $51.7 million cost of
restructuring charges) in the three and six months ended June 30, 1998,
respectively. The increase in operating income in both comparable periods is
primarily related to a reduction in expenses associated with the 1998 Plan.
OTHER INCOME AND EXPENSE, NET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/99 6/30/98 Change 6/30/99 6/30/98 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 3.1 $ 2.0 53% $ 6.4 $ 4.7 35%
Percentage of total revenues 1% 1% 2% 1%
Interest expense and other, net $ 0.5 $ 0.3 57% $ 0.2 $ (0.3) *
Percentage of total revenues * * * *
</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 related hedging activities,
including the cost of hedging foreign currency exposures. Interest income in
absolute dollars for the three and six months ended June 30, 1999 increased $1.1
million and $1.7 million, respectively, as compared to the three and six months
ended June 30,1998. This increase is due primarily to larger average invested
cash balances in 1999. The decrease in interest expense and other, net, in
absolute dollars for the three and six months ended June 30, 1999, as compared
to the three and six months ended June 30, 1998, is primarily due to lower net
costs of hedging activities and net gains resulting from the Company's foreign
currency transactions.
PROVISION FOR INCOME TAXES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/99 6/30/98 Change 6/30/99 6/30/98 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $10.5 $3.5 199% $14.1 $7.0 100%
</TABLE>
The Company recorded income tax provisions of $10.5 million and $14.1 million in
the three and six months ended June 30, 1999, respectively, as compared $3.5
million and $7.0 million in the three and six months ended June 30, 1998. The
income tax provisions for these periods are primarily the result of tax on
earnings generated from operations and withholding taxes on revenues in certain
international jurisdictions.
The Company had net deferred tax assets of $41.1 million at June 30, 1999. The
deferred tax assets were net of a valuation allowance of $42.6 million.
Realization of the Company's net deferred tax assets is dependent upon the
Company generating sufficient taxable income in future years in appropriate tax
jurisdictions to obtain benefit from the reversal of temporary differences
17
<PAGE> 18
and from tax credit carryforwards. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced and any such adjustments could have a material
adverse impact on the Company's effective tax rate and results of operations in
future periods.
NET INCOME (LOSS) PER SHARE
(DOLLARS AND SHARES IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Percent Ended Ended Percent
6/30/99 6/30/98 Change 6/30/99 6/30/98 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 14.3 $ 0.4 * $ 20.2 $(80.7) *
Percentage of total revenues 7% 0% 5% (19%)
Basic net income (loss) per share $ 0.17 $ 0.01 * $ 0.25 $(1.00) *
Diluted net income (loss) per share $ 0.17 $ 0.01 * $ 0.24 $(1.00) *
Shares used in computing basic net
income (loss) per share 82.2 80.8 2% 82.0 80.6 2%
Shares used in computing diluted net
income (loss) per share 83.8 80.9 4% 83.4 80.6 4%
</TABLE>
- ----------
Note - The effect of outstanding stock options is excluded from the calculation
of diluted net loss per share as their inclusion would be antidilutive.
* Not meaningful
The Company reported net income of $14.3 million and $20.2 million in the three
and six months ended June 30, 1999, respectively, as compared to net income of
$0.4 million and a net loss of $80.7 million in the three and six months ended
June 30,1998, respectively. The net income in the three and six months ended
June 30, 1999 includes a pre-tax benefit from cost of restructuring reversals of
$5.6 million. The net loss in the six months ended June 30, 1998 includes
pre-tax cost of restructuring charges of $51.7 million. The increase in net
income for the three and six months ended June 30, 1999 as compared to the same
period of 1998 is primarily due to the implementation of the 1998 Plan which
occurred in the first and fourth quarters of 1998. See "Cost of Restructuring
(Reversals)."
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Six Six
Months Months
Ended Ended Percent
6/30/99 6/30/98 Change
------- ------- ------
<S> <C> <C> <C>
Working capital $ 80.1 $ 26.0 208%
Cash, cash equivalents and cash investments $ 299.3 $ 198.2 51%
Net cash provided by operating activities $ 75.2 $ 4.8 *
Net cash used for investing activities $ 103.8 $ 8.2 *
Net cash used for financing activities $ 1.3 $ 14.0 (91%)
</TABLE>
- ---------------
* Not meaningful
Net cash provided by operating activities was $75.2 million for the six months
ended June 30, 1999 compared to $4.8 million for the six months ended June 30,
1998. This increase was largely attributable to the $100.9 million increase in
net income (loss) for the six months ended June 30, 1999 as compared to the six
months ended June 30, 1998. Depreciation and amortization charges,
18
<PAGE> 19
which are included in the net income (loss), but do not require
the use of cash, amounted to $47.1 million for the six months ended June 30,
1999 compared to $56.3 million in the six months ended June 30, 1998. This
decrease in depreciation and amortization was primarily due to the write-off of
assets in connection with the 1998 Plan. Additionally, net cash provided by
operating activities reflects a decrease in accounts receivable of $35.5 million
in the six months ended June 30, 1999 as compared to a decrease of $21.8 million
in the six months ended June 30, 1998.
Net cash used for investing activities increased to $103.8 million for the six
months ended June 30, 1999 compared to $8.2 million in the six months ended June
30, 1998. Investing activities included capital expenditures of $8.5 million for
the six months ended June 30, 1999 compared to $13.7 million in the same period
for 1998. This decrease reflects a reduction in capital expenditures required to
support the Company's employee base as well as the associated systems and
infrastructure. The Company's headcount was reduced to 4,074 at June 30, 1999
from 4,773 at June 30, 1998. Additionally, for the six months ended June 30,
1999, investing activities included $8.0 million of cash used for business
combinations compared to $5.0 million in the six months ended June 30, 1998, as
well as net purchases of investments amounting to $85.6 million in the six
months ended June 30, 1999 compared to net redemptions of $23.7 million in the
six months ended June 30, 1998. Also, in the six months ended June 30, 1998, the
Company collateralized its obligation to a lessor by pledging $13.3 million in
cash deposits.
Net cash used for financing activities for the six months ended June 30, 1999
was $1.3 million compared to net cash used for financing activities of $14.0
million in the same period for 1998. The net cash used for financing activities
for the six months ended June 30, 1999 was primarily due to the repurchase by
the Company of its common stock, partially offset by the issuance of common
stock and the sale of treasury stock associated with the Company's stock option
and employee stock purchase plans.
The Company engages in business operations around the world and is therefore
exposed to foreign currency fluctuations. As of June 30, 1999, the Company had
identifiable assets totaling $153.0 million associated with its European
operations and $73.2 million associated with its Intercontinental operations.
The Company experiences foreign exchange transaction exposure from certain
balances denominated in different currencies. The Company hedges certain of
these short-term exposures under a plan approved by the Board of Directors (see
"Qualitative and Quantitative Disclosure of Market Risk"). The Company also
experiences foreign exchange translation exposure on its net assets denominated
in different currencies. As certain of these net assets are considered by
Sybase, Inc., the U.S. parent company, to be a permanent investment in the
respective subsidiaries, the related foreign currency translation gains and
losses are reflected in an accumulated other comprehensive loss account in
stockholders' equity.
Cash, cash equivalents and cash investments totaled $299.3 million at June 30,
1999, compared to $198.2 million at June 30, 1998.
During the six months ended June 30, 1999, the Company repurchased 1.9 million
shares of its common stock for $17.0 million pursuant to the Board of Directors'
authorization in February 1998 to repurchase up to $25.0 million of the
Company's outstanding common stock.
19
<PAGE> 20
The Company believes that it has the financial resources needed for the
foreseeable future to meet its presently anticipated business requirements,
including capital expenditures and strategic operating programs.
FUTURE OPERATING RESULTS
The Company's future operating results may vary substantially from period to
period. The price of the Company's common stock will fluctuate in the future,
and an investment in the Company's common stock is subject to a variety of
significant risks, including but not limited to the specific risks identified
below. The results of operations for the three and six months ended June 30,
1999 are not necessarily indicative of results for the year ending December 31,
1999 or any other future period. Expectations, forecasts, and projections by the
Company or others are by nature forward-looking statements, and future results
cannot be guaranteed. Forward-looking statements that were true at the time made
may ultimately prove to be incorrect or false. Inevitably, some investors in the
Company's securities will experience gains while others will experience losses
depending on the prices at which they purchase and sell securities. Prospective
and existing investors are strongly urged to carefully consider the various
cautionary statements and risks set forth in this report.
The timing and amount of the Company's revenues from license fees are subject to
a number of factors that make estimation of revenues and operating results prior
to the end of a quarter extremely uncertain. Sybase has generally experienced a
seasonal pattern of license fees revenues decline between the fourth quarter and
the succeeding first quarter contributing to lower total revenues and operating
earnings in the first quarter compared to the prior fourth quarter. The Company
has operated historically with little or no backlog and, as a result, license
fees revenues in any quarter are dependent on orders booked and shipped in that
quarter. In addition, the timing of closing of large license agreements
increases the risk of quarter-to-quarter fluctuations and the uncertainty of
estimating quarterly operating results. The Company has experienced a pattern of
recording 50 percent to 70 percent of its quarterly license fees revenues in the
third month of the quarter, with a concentration of such revenues in the last
two weeks of such third month. The Company's operating expenses are based on
projected annual and quarterly revenue levels and are incurred approximately
ratably throughout each quarter. Because the Company's operating expenses are
relatively fixed in the short term, if projected revenues are not realized in
the expected period, the Company's operating results for that period would be
adversely affected and could result in an operating loss, as occurred in the
first quarter of 1998. Failure to achieve revenues, earnings, and other
operating and financial results as forecast or anticipated by brokerage firms
and industry analysts has previously resulted in, and in the future could result
in, an immediate and substantial adverse effect on the market price of the
Company's stock. The Company may not achieve, in the future, the relatively high
rates of growth experienced by the Company in and prior to 1994 or the rates of
growth projected for the software markets in which Sybase competes.
The Company recently realigned its sales force, product teams and professional
services capabilities into four new divisions, each one focused upon one of four
key markets: Enterprise Solutions, Mobile and Embedded Computing, Internet
Applications and Business Intelligence. This reorganization took effect in
January 1999. Although such changes are intended to enhance overall revenues and
profitability, they could, in the short-term, materially and adversely affect
the Company's
20
<PAGE> 21
sales process, revenues and results of operations. There have been a number
of changes in the Company's executive management. In the fall of 1998, the
Company completed an executive management transition pursuant to which John Chen
became the Company's Chief Executive Officer and Chairman of the Board. In early
1999, Pieter Van der Vorst became the Company's Chief Financial Officer, and
Pamela George was named Vice President of Corporate Marketing. The Company's
divisional reorganization also resulted in the appointment of one general
manager for each division, and a number of other executive reassignments at the
end of 1998 and beginning of 1999. The Company will make other management and
organization changes in the future. Organizational and management changes are
intended to enhance productivity and competitiveness. However, such changes may
not produce the desired results and could materially adversely affect the
Company's results of operations.
The market for the Company's stock is highly volatile. The trading price of the
Company's common stock has fluctuated widely from 1995 through 1999 and may
continue to fluctuate in the future in response to quarterly variations in
operating and financial results, announcements of technological innovations, new
products, or customer contracts won by the Company or its competitors. Changes
in prices of the Company's or its competitors' products and services, changes in
product mix, changes in the Company's revenues and revenue growth rates for the
Company as a whole or for individual geographic areas, business units, products
or product categories, as well as other events or factors could also affect the
Company's stock prices. Statements or changes in opinions, ratings or earnings
estimates made by brokerage firms and industry analysts relating to the market
in which the Company does business, the Company's competitors, or the Company or
its products specifically, have resulted, and could in the future result, in an
immediate and adverse effect on the market price of the Company's common stock.
For example, due to a variety of factors, the Company's stock price declined
significantly during the first quarter of 1996 and the first quarter of 1998. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations that have particularly affected the market price for many
high technology companies even though such fluctuations often have been
unrelated to the operating performance of these companies.
An increased portion of the Company's revenues in recent quarters has been
derived from its international operations. In the six months ended June 30, 1999
revenues from its international operations represented 40 percent of the
Company's total revenues. In 1998 and 1999, the Company closed subsidiaries in
Mexico, Thailand, Chile, Peru and Venezuela. In addition, there have been
several management and organizational changes within the international
operations. For example, during 1998 and 1999, the country managers in
Australia, Switzerland and Japan and the European General Manager resigned or
were replaced. International revenues, in absolute dollars and as a percentage
of total revenues, may fluctuate in part due to the growth and, in some cases,
the relative immaturity or closure of international organizations. The Company's
operations and financial results could be significantly affected by factors
associated with international operations such as changes in foreign currency
exchange rates and uncertainties relative to regional economic circumstances,
the introduction of the Euro currency unit, political instability in emerging
markets, and difficulties in staffing and managing foreign operations, as well
as other risks associated with international activities. For example, the
economic unrest and currency devaluations in Asia in late 1997 adversely
affected collection of receivables, particularly dollar denominated receivables
and the recognition of revenue since the fourth quarter of 1997.
21
<PAGE> 22
The market for the Company's software products and services is extremely
competitive and characterized by dynamic customer demands, rapid technological
and marketplace changes, and frequent product enhancements and new product
introductions. The Company competes with a number of companies, including Oracle
Corporation, Microsoft Corporation, Informix Corporation, IBM Corporation, and
Computer Associates, Inc. Many of the Company's competitors and potential
competitors have significantly greater financial, technical, sales, and
marketing resources, and a larger installed base than the Company. In addition,
many of these competitors offer additional categories of products, such as
operating systems, that the Company does not offer and which may provide those
companies with a competitive advantage in various circumstances. New or enhanced
products, many of which have been announced and many of which are continually
introduced by existing or future competitors in the software industry, could
increase the competition faced by the Company's products from time to time and
result in greater price pressure on certain of the Company's products,
especially to the extent that market acceptance for personal computer-oriented
and Windows NT technologies increases at the expense of UNIX-based systems. A
failure by the Company to compete successfully with its existing competitors or
with new competitors could have a material adverse effect on the Company's
business and results of operations and on the market price of the Company's
common stock.
The Company's future results of operations will depend in part on its ability to
enhance existing products and to introduce new products that meet dynamic
customer requirements on a timely and cost-effective basis. Customer
requirements for products can rapidly change as a result of innovations or
changes within the computer hardware and software industries. For example, the
widespread use of the Internet is rapidly giving rise to new customer
requirements as well as new methods and practices of selling, marketing, and
distributing products and services. Sybase's future results will depend in part
on its success in developing new products, making generally available products
that have been previously announced, enhancing its existing products and
adapting its existing products to changing customer requirements, and ultimately
gaining market acceptance for such new or enhanced products. In the second
quarter of 1999, the Company announced general availability of Sybase Financial
Server(TM) 1.0, an e-commerce application platform for securities trading and
electronic banking, as well as Enterprise Application Studio(TM) 3.0, a complete
suite of integrated application development and deployment products including
Enterprise Application Server(TM) 3.0, PowerJ(TM) 3.0 and PowerBuilder(R) 7.0.
The Company also announced availability of four Industry Warehouse Studios(TM)
for the healthcare, telecommunications, insurance and retail banking industries.
Each product set includes packaged applications for company-specific
customization and data warehouse management. Earlier in the year, the Company
released the latest version of Adaptive Server(R) Anywhere, which includes the
UltraLite(TM) deployment option, an application-optimized ultra-small database
that resides locally on handheld devices and embedded systems, and Mobilink
two-way enterprise server synchronization technology for the Windows CE
operating system and 3Com Palm Computing platform. The creation of certain
integrated product sets is intended to enhance the ability of the Company's
partners and direct sales force to market and sell more complete solutions to
customers in a single package. While such integration is intended to improve
productivity, revenues and profitability, the elimination of the availability of
individual products subsumed within integrated product sets could have an
adverse effect on license fees and service revenues, particularly if such
product sets are not well received in the marketplace.
22
<PAGE> 23
Sybase's results of operations will also depend increasingly on the ability of
its products to interoperate and perform well with existing and future leading,
industry-standard application software products intended to be used in
connection with relational database management systems (RDBMSs). Failure to meet
existing or future interoperability and performance requirements of certain
independent vendors marketing such applications in a timely manner has in the
past and could in the future adversely affect the market for Sybase's products.
Certain leading applications are not interoperable with Sybase RDBMSs, and
others may never be available on Sybase's RDBMSs. In addition, the Company's
application development tools, database design tools, and certain connectivity
products are designed for use with RDBMSs offered by the Company's competitors.
Vendors of non-Sybase RDBMSs and related products may become less willing in the
future to provide the Company with access to products, technical information,
and marketing and sales support. If existing and potential customers of the
Company who use non-Sybase RDBMSs refrain from purchasing such products due to
concerns that the development, quality, and support of products for non-Sybase
RDBMSs will diminish over time, the Company's business, results of operations,
and financial condition could be materially and adversely affected. The
Company's products are used by many customers to build and deploy their own
custom applications. Increased reliance on prepackaged applications and
diversion of internal information technology budgets to rectify Year 2000
compliance issues has and may in the future continue to have the effect of
reducing the internal development of custom applications overall. Such a
reduction has and may in the future continue to have a material and adverse
impact on the market for the Company's products and the Company's business,
results of operations and financial condition. Furthermore, many products
licensed by the Company contain components developed by third parties. If the
Company's products or such third party products are not Year 2000 compliant, or
cannot be determined to be compliant, market acceptance of the Company's
products could be adversely affected.
Commercial acceptance of the Company's products and services could be adversely
affected by critical or negative statements or reports by brokerage firms,
industry and financial analysts, and industry periodicals concerning the Company
and its products, business, or competitors, or by the advertising or marketing
efforts of competitors that could affect customer perception. In addition,
customer perception of Sybase and its products could be adversely affected by
financial results, particularly revenues and profitability, reported for the
1999 fiscal year or future periods, by reductions in the applicable market share
of the Company's products and by related press reports.
The Company's ability to achieve its future revenues and earnings will depend in
part on the ability of its officers and key personnel to manage growth, costs,
and expenses successfully through the implementation of appropriate management
systems and controls. Failure to effectively implement or maintain such systems
and controls could adversely affect the Company's business and results of
operations. The success of the Company also depends in part on its ability to
attract and retain qualified technical, managerial, sales, and marketing
personnel. The competition for such personnel is intense in the software
industry and, Sybase believes, has increased substantially in recent years.
There have been a number of recent changes in the Company's executive management
team, including the appointment in 1998 of John Chen as the Company's Chief
Executive Officer and Chairman of the Board, and the appointment in early 1999
of Pieter Van der Vorst as Chief Financial Officer, and Pamela George as Vice
President of Corporate Marketing. Moreover, in connection with the Company's
reorganization into four operating divisions and the appointment of one general
manager for each division, a number of executives
23
<PAGE> 24
changed responsibilities at the end of 1998 and in early 1999. Further changes
in management, the reduction in the overall number of Sybase employees made
during 1998, and the Company's financial and stock price performance relative to
companies with which Sybase competes for employees, could affect the amount of
employee turnover. The Company has experienced in recent quarters a high rate of
employee turnover. The failure to effectively recruit, train, and retain
qualified personnel or high rates of employee turnover, particularly among
consulting, engineering or sales staff, could adversely affect the Company's
product development efforts, sales of products and services and other aspects of
the Company's operations and results.
Sybase currently ships most of its products in North America from its
Emeryville, California and Massachusetts distribution facilities. Because of the
pattern of recording a high percentage of quarterly revenues within the last two
weeks of the quarter, the closure or inoperability of one or more of these
facilities (or a disruption of business operations generally) during such weeks
due to natural calamity or due to a systems or power failure could have a
material adverse effect on the Company's ability to record revenues for such
quarter and, therefore, on the overall results of operations for such quarter.
The Company has acquired a number of companies in the past. During 1998, the
Company acquired Intellidex Systems, L.L.C., a provider of meta data management
technology for deploying and managing data warehouse environments. In 1999, the
Company acquired Data Warehouse Network Limited, a provider of industry specific
data warehouse solutions and purchased debt instruments convertible into a 29.9
percent interest in Demica PLC, a provider of a wholesale banking application
using the Company's technology. The Company will likely acquire other
distributors, companies, products, or technologies in the future. The
achievement of the desired benefits of these and future acquisitions will depend
in part upon whether the integration of the acquired businesses is achieved in
an efficient and effective manner. The successful combination of businesses will
require, among other things, integration of the companies' related product
offerings and coordination of their sales, marketing, and research and
development efforts. The difficulties of such coordination may be increased by
the geographic distance between separate organizations. The Company may be
unable to integrate effectively these or future acquired businesses and may not
obtain the anticipated or desired benefits of such acquisitions. Such
acquisitions may result in costs, liabilities, or additional expenses that could
adversely affect the Company's results of operations and financial condition. In
addition, acquisitions or changes in business or market conditions may cause the
Company to revise its plans, which could result in unplanned expenses or a loss
of anticipated benefits from past investments.
During 1998, the Company incurred restructuring charges of $74.2 million. The
Company does not currently anticipate that it will incur additional
restructuring charges in 1999 and has recorded cost of restructuring reversals
of $5.6 million in the second quarter of 1999. However, as this is a
forward-looking statement, future actual results may differ based on the actual
results of operations experienced in 1999 and the various factors described
above that affect future results.
Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position No. 97-2, "Software
Revenue Recognition" (SOP 97-2), which supercedes SOP 91-1 and which prohibits
the restatement of prior financial statements. SOP 97-2 addresses software
revenue recognition matters primarily from a
24
<PAGE> 25
conceptual level and detailed implementation guidelines have not been issued. In
March 1998, the AICPA issued Statement of Position No. 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition", which
defers for one year the application of certain provisions of SOP 97-2. These
provisions limit what is considered vendor-specific objective evidence of the
fair value of the various elements in a multiple-element arrangement. All other
provisions of SOP 97-2 remain in effect. These and future changes to, and
interpretations of, accounting standards and rules could adversely affect the
amount and timing of recognition of revenue.
YEAR 2000
The Company is aware of and is addressing the issues associated with the
programming code in existing computer systems as the year 2000 approaches. The
"Year 2000" issue is pervasive and complex, as many computer systems will be
affected in some way by the rollover of the two-digit year value to 00. Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail. The "Year 2000" issue creates potential risk for the
Company from unforeseen problems in its own computer systems, from third parties
with whom the Company deals on financial transactions worldwide and in its own
software products licensed to customers. Failures of the Company's and/or third
parties' computer systems could have a material impact on the Company's ability
to conduct its business. Not all products previously licensed by the Company
meet current standards for Year 2000 compliance, and many of these products are
still in use by customers. Complex software products, such as the type licensed
by the Company and its competitors, generally are not completely free from
"bugs" and other defects. The existence of such "bugs" may give rise to legal
claims against the Company, notwithstanding standard provisions in the Company's
license agreements with its customers disclaiming express and implied warranties
against such errors. Such legal claims or claims that products previously
licensed by the Company are not Year 2000 compliant could have a material
adverse impact on the Company's business and results of operations.
As of March 1999, the Company completed its assessment of all of its critical
worldwide infrastructure systems (e.g., computer and telephone systems) and
business systems (e.g., revenue, sales and marketing and finance functions) and
also completed much of the remedial work necessary to make these systems Year
2000 compliant. The outstanding list of such nonconforming applications and
systems is small and the Company believes it has identified upgrade or
replacement solutions to make all of these systems Year 2000 compliant. Most
outstanding items are scheduled for installation of certified upgrades from
suppliers, which have been received, and the Company expects to effect all
solutions by September 1999. The Company believes that the risk of Year 2000
problems in the Company's internal applications has been low because the
Company's systems are generally run using its own technology and its partners'
products, and relatively little development work other than assessment and
testing has been required to insure Year 2000 compliance. Notwithstanding the
foregoing, there is no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and that they will not have
an adverse effect on the Company's systems. As such, the Company is in the
process of developing a contingency plan in the event its internal systems are
not converted on a timely basis. The Company does not believe that the cost of
such actions will have a material adverse effect on the Company's results of
operations or financial condition. There are no assurances, however, that there
will not be a delay in, or increased cost
25
<PAGE> 26
associated with, the implementation of such changes, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations. Factors that could cause unusual costs and delays include the
availability and cost of personnel trained in this area, and the ability to
locate and correct all relevant computer codes and other uncertainties.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The following discussion about the Company's risk management activities includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements for the reasons described under the caption "Future Operating
Results."
As a global concern, the Company faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on the Company's
financial position and results of operations. Historically, the Company's
primary exposures have related to nondollar-denominated sales and expenses in
Europe, Asia Pacific, including Japan and Australia, and Latin America. In order
to reduce the effect of foreign currency fluctuations, the Company hedges its
exposure on certain transactional balances that are denominated in foreign
currencies through the use of foreign currency forward exchange contracts. For
the most part, these exposures consist of intercompany accounts receivable owed
to the Company as a result of local sales of software licenses by the Company's
international subsidiaries. The majority of these exposures are denominated in
European and Asia Pacific currencies, primarily the Euro and Hong Kong dollar.
These forward exchange contracts are recorded at fair value and are short-term
in nature (usually 30 days or less). At June 30, 1999, the Company had forward
exchange contracts to exchange various foreign currencies for U.S. dollars, Euro
and Hong Kong dollars in the amounts of $6,793,000, $7,863,000 and $1,542,000,
respectively, and to exchange U.S. dollars and Euro dollars into various foreign
currencies in the amounts of $18,247,000 and $4,676,000, respectively. Neither
the cost nor the fair value of these foreign currency forward exchange contracts
was material at June 30, 1999. One major U.S. multinational bank is counterparty
to substantially all of these contracts.
The Company maintains an investment portfolio holding of various issuers, types
and maturities. These securities are generally classified as available for sale,
and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of stockholders'
equity, net of tax, if material. Unrealized gains and losses at June 30, 1999
were not material. The Company's investments consisted primarily of short-term
money market instruments. Of the Company's cash equivalent and cash investment
balances of $299,329,000 at June 30, 1999, approximately 60 percent have
maturity dates of less than 180 days, and 40 percent of this balance have
maturities of 180 days to two years. The Company does not believe its exposure
to interest rate risk is material given the short-term nature of its investment
portfolio.
26
<PAGE> 27
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Following the Company's announcement on April 3, 1995 of its preliminary results
for the first fiscal quarter ended March 31, 1995, several class action lawsuits
were filed against the Company and certain of its officers in the Northern
California District Court. On April 21, 1999, the Company and all the individual
defendants reached an agreement in principle with plaintiffs to settle the case
for $14,800,000, of which $1,500,000 is to be paid by the Company and the
remainder of which is to be paid by the Company's insurers. The Company has paid
its share of the settlement to plaintiffs' escrow fund, and intends to carry out
the terms of the settlement agreement. On April 29, 1999, during the time in
which the settlement agreement was being formally documented, the District Court
granted summary judgment in favor of the Company and all the individual
defendants. Plaintiffs have appealed the judgment to the United States Court of
Appeals, Ninth Circuit.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Registrant was held on May 27, 1999.
At the Annual Meeting, the following matters were submitted to a vote of
stockholders and were approved, with the votes cast on each matter indicated:
1. Election of two Class I directors, each to serve a three-year term
expiring upon the 2002 Annual Meeting of Stockholders or until a
successor is duly elected and qualified. John S. Chen and Alan B.
Salisbury were the only nominees and each was elected (73,133,110 votes
were cast for election of Mr. Chen and 967,269 were cast withholding
authority to vote for his election; 73,174,306 votes were cast for
election of Mr. Salisbury and 926,073 were cast withholding authority to
vote for his election). There were no abstentions or non-votes. In
addition to these directors, the Company's incumbent directors (Robert
S. Epstein, Richard C. Alberding, L. William Krause, Robert P. Wayman
and Jeffrey T. Webber) had terms that continued after the 1999 Annual
Meeting.
2. Approval of an amendment to the 1996 Stock Plan increasing the total
number of shares of Common Stock reserved for issuance thereunder by
1,800,000 shares (58,630,497 for, 14,190,486 votes against, 311,792
abstentions, and 967,604 non-votes.)
3. Approval of an amendment to the Amended and Restated 1991 Employee Stock
Purchase Plan and the Amended and Restated 1991 Foreign Subsidiary
Employee Stock Purchase Plan increasing the total number of shares of
Common Stock reserved for issuance thereunder by 2,300,000 shares
(69,990,899 for, 2,837,292 against, 304,584 abstentions, and 967,604
non-votes.)
4. Approval of an amendment to the 1992 Director Stock Option Plan
increasing the amount of the annual stock option grant made to
nonemployee directors from 12,000 shares to 16,000 shares (65,264,341
for, 7,481,674 against, 386,760 abstentions, and 967,604 non-votes.)
27
<PAGE> 28
5. Approval of an amendment to the Restated Certificate of Incorporation to
reorganize the Board of Directors into a single class (39,930,736 for,
1,317,523 against, 333,064 abstentions, and 32,519,056 non-votes.)
6. Ratification of the appointment of Ernst & Young LLP as independent
auditors for the year ending December 31, 1999 (73,566,707 for, 312,858
against, 220,814 abstentions and no non-votes.)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
28
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 12, 1999 SYBASE, INC.
By /s/ PIETER VAN DER VORST
------------------------------------------
Pieter Van der Vorst
Vice President and Chief Financial Officer
(Principal Financial Officer)
By /s/ MARTIN J. HEALY
------------------------------------------
Martin J. Healy
Vice President and Corporate Controller
(Principal Accounting Officer)
29
<PAGE> 30
EXHIBIT INDEX TO SYBASE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SYBASE INC. AS OF JUNE 30, 1999 AND FOR THE
YEARS THEN ENDED.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 188,747
<SECURITIES> 60,726
<RECEIVABLES> 189,435
<ALLOWANCES> (27,434)
<INVENTORY> 0
<CURRENT-ASSETS> 443,726
<PP&E> 369,494
<DEPRECIATION> (287,783)
<TOTAL-ASSETS> 679,911
<CURRENT-LIABILITIES> 363,643
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 421,204
<TOTAL-LIABILITY-AND-EQUITY> 679,911
<SALES> 193,973
<TOTAL-REVENUES> 418,455
<CGS> 20,788
<TOTAL-COSTS> 106,152
<OTHER-EXPENSES> 72,563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 34,236
<INCOME-TAX> 14,061
<INCOME-CONTINUING> 20,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,175
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.24
</TABLE>
