<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 March 31, 2000
[ ] 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 April 30, 2000, 89,186,260 shares of the Registrant's Common Stock, $.001 par
value, were outstanding.
<PAGE> 2
SYBASE, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3: Quantitative and Qualitative Disclosures of Market Risk 29
Part II: Other Information
Item 1: Legal Proceedings 31
Item 6: Exhibits and Reports on Form 8-K 32
Signatures 33
Exhibit Index 34
</TABLE>
2
<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands, except share and per share data) 2000 1999
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 272,991 $ 250,103
Short-term cash investments 52,029 59,094
--------- ---------
Total cash, cash equivalents and short-term cash investments 325,020 309,197
Accounts receivable, net 184,310 182,708
Deferred income taxes 15,826 15,826
Other current assets 19,546 14,924
--------- ---------
Total current assets 544,702 522,655
Long-term cash investments 37,892 43,702
Property, equipment and improvements, net 66,558 67,587
Deferred income taxes 25,238 25,238
Capitalized software, net 34,040 35,934
Goodwill and other purchased intangibles, net 176,397 24,528
Other assets 8,989 17,691
--------- ---------
Total assets $ 893,816 $ 737,335
========= =========
Current liabilities:
Accounts payable $ 20,143 $ 8,349
Accrued compensation and related expenses 42,881 57,625
Accrued income taxes 30,381 40,253
Other accrued liabilities 108,333 101,876
Deferred revenue 216,672 187,323
--------- ---------
Total current liabilities 418,410 395,426
Other liabilities 5,012 5,799
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; 90,769,663 shares issued and 89,695,918
outstanding (1999-82,952,192 shares issued and 80,920,691
outstanding) 91 83
Additional paid-in capital 573,314 432,352
Accumulated deficit (58,165) (48,037)
Accumulated other comprehensive loss (20,165) (16,426)
Cost of 1,073,745 shares of treasury stock (1999-2,031,501 shares) (24,681) (31,862)
--------- ---------
Total stockholders' equity 470,394 336,110
--------- ---------
Total liabilities and stockholders' equity $ 893,816 $ 737,335
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
(In thousands, except per share data) 2000 1999
--------- ---------
<S> <C> <C>
Revenues:
License fees $ 110,668 $ 98,270
Services 116,099 109,998
--------- ---------
Total revenues 226,767 208,268
Costs and expenses:
Cost of license fees 10,827 12,296
Cost of services 60,785 54,042
Sales and marketing 83,268 77,872
Product development and engineering 31,692 37,178
General and administrative 17,519 17,051
Amortization of goodwill and other purchased intangibles 7,308 3,413
In-process research and development 8,000 --
--------- ---------
Total costs and expenses 219,399 201,852
--------- ---------
Operating income 7,368 6,416
Interest income 3,952 3,287
Interest expense and other, net 628 (247)
--------- ---------
Income before income taxes 11,948 9,456
Provision for income taxes 5,257 3,581
--------- ---------
Net income $ 6,691 $ 5,875
========= =========
Basic net income per share $ 0.08 $ 0.07
========= =========
Shares used in computing basic net income per share 86,579 81,781
========= =========
Diluted net income per share $ 0.07 $ 0.07
========= =========
Shares used in computing diluted net income per share 91,553 82,924
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
(In thousands) 2000 1999
--------- ---------
<S> <C> <C>
Cash and cash equivalents, beginning of year $ 250,103 $ 224,665
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 6,691 5,875
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 25,077 23,889
Write-off in-process research and development 8,000 --
Loss on disposal of assets 5 2,672
Deferred income taxes -- (24)
Changes in assets and liabilities:
Accounts receivable 825 44,340
Other current assets (4,621) (3,098)
Accounts payable 8,142 (4,247)
Accrued compensation and related expenses (16,139) (4,427)
Accrued income taxes (9,879) 2,241
Other accrued liabilities 6,778 (8,447)
Deferred revenues 28,636 (177)
Other (819) 21
--------- ---------
Net cash provided by operating activities 52,696 58,618
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale cash investments (22,112) (46,759)
Maturities of available-for-sale cash investments 34,986 6,784
Sales of available-for-sale cash investments -- 2,495
Business combinations, net of cash acquired (26,907) (8,047)
Purchases of property, equipment and improvements (7,903) (4,551)
Capitalized software development costs (3,697) (4,103)
Decrease in other assets 8,987 2,512
--------- ---------
Net cash used for investing activities (16,646) (51,669)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in other current liabilities -- (157)
Proceeds from issuance of common stock -- 4,482
Proceeds from the issuance of treasury stock 15,572 4,223
Purchases of treasury stock (25,211) (1,079)
--------- ---------
Net cash (used for) provided by financing activities (9,639) 7,469
Effect of exchange rate changes on cash (3,523) (4,383)
--------- ---------
Net increase in cash and cash equivalents 22,888 10,035
Cash and cash equivalents, end of period 272,991 234,700
Cash investments, end of period 89,921 62,428
--------- ---------
Total cash, cash equivalents, and cash investments, end
of period $ 362,912 $ 297,128
========= =========
Supplemental disclosures:
Interest paid $ 47 $ 11
========= =========
Income taxes paid $ 12,749 $ 3,582
========= =========
</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, 1999 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,
1999. The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of results for the entire fiscal year ending December
31, 2000. Certain previously reported amounts have been reclassified to conform
to the current presentation format.
2. Business Combinations. On January 20, 2000, the Company acquired Home
Financial Network (HFN), an Internet financial services company specializing in
the development of customized e-Finance Web sites, in a transaction accounted
for as a purchase. The total purchase cost was approximately $167.4 million,
consisting of the following:
<TABLE>
<S> <C>
(In millions)
Issuance of 7,817,471 Sybase shares $ 129.8
HFN stock options assumed 11.2
Cash 25.9
Merger costs, legal and accounting .5
--------
Total Purchase Consideration $ 167.4
========
</TABLE>
The estimated fair value of the common stock to be issued is based on the
average closing price of the Sybase common stock on the two days before and
after the acquisition was announced on December 1, 1999. The estimated fair
value of the HFN options assumed, which will be exchanged for cash and Sybase
options, is based on the Black-Scholes model using the following assumptions:
- Expected lives of 0.4 to 4.0 years
- Expected volatility factor of 68.24%
- Risk-free interest rate of 5.51%
- Expected dividend rate of 0%
The estimated excess of the purchase price over the fair value of the net assets
acquired has been valued at $166.5 million. Of this excess, $20.0 million was
allocated to the established customer list, $18.0 million was allocated to
developed technology, $120.5 million was allocated to goodwill, and $8.0 million
was allocated to in-process research and development based upon a valuation
prepared by an independent third-party appraiser. The amount allocated to
in-process research
6
<PAGE> 7
SYBASE INC.
-----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and development was charged to expense as a non-recurring charge in the first
quarter of 2000 since the in-process research and development had not yet
reached technological feasibility and had no alternative future uses. The
amounts allocated to the established customer list, the developed technology and
the goodwill are being amortized on a straight-line basis over periods of 10
years, 6 years and 7 years, respectively.
The following unaudited pro forma quarterly financial information presents the
combined results of operations of Sybase and HFN as if the acquisition had
occurred as of the beginning of 1999 and 2000, after giving effect to certain
adjustments, including amortization of goodwill and other intangible assets, but
excluding the non-recurring charge for the write-off of $8.0 million in acquired
in-process research and development. The pro forma financial information does
not necessarily reflect the results of operations that would have occurred had
the two companies constituted a single entity during such periods.
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
(In thousands except for per share data) 3/31/00 3/31/99
----------- -----------
<S> <C> <C>
Revenue $ 226,767 $ 209,079
Net income (loss) 10,321 (260)
Basic net income (loss) per share 0.12 (0.00)
Diluted net income (loss) per share 0.11 (0.00)(a)
</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.
In March 1999, the Company paid $5.4 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.
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.
7
<PAGE> 8
SYBASE INC.
-----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Net income per share. Shares used in computing basic and diluted net income
per share are based on the weighted average shares outstanding in each period,
excluding treasury stock. Basic net income per share excludes any dilutive
effects of stock options. Diluted net income 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 per
share:
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
(In thousands, except per share data) 3/31/00 3/31/99
--------- ---------
<S> <C> <C>
Net income $ 6,691 $ 5,875
Shares used in computing basic net income per share 86,579 81,781
Effect of dilutive securities - stock options 4,974 1,143
--------- ---------
Shares used in computing diluted net income per share 91,553 82,924
========= =========
Basic net income per share $ 0.08 $ 0.07
========= =========
Diluted net income per share $ 0.07 $ 0.07
</TABLE>
4. Comprehensive Income. The following table sets forth the calculation of
comprehensive income for all periods presented:
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
(In thousands) 3/31/00 3/31/99
--------- ---------
<S> <C> <C>
Net income $ 6,691 $ 5,875
Foreign currency translations adjustments (3,739) (2,044)
--------- ---------
Comprehensive income $ 2,952 $ 3,831
========= =========
</TABLE>
5. New Accounting Pronouncements. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101). SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements. All registrants
are expected to apply the accounting and disclosures described in SAB 101. The
Company is currently evaluating SAB 101 and has not completed its assessment of
the impact of adoption. Any change in the Company's revenue recognition policy
resulting from SAB 101 will be reported as a change in accounting principle in
the quarter ending June 30, 2000.
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
8
<PAGE> 9
SYBASE INC.
-----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
is required to adopt Statement 133 for the year ending December 31, 2001. The
Company has not determined the effect, if any, that adoption will have on its
consolidated financial position or results of operations.
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.
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 adoption of SOP 98-9 did not have a material impact on the Company's
consolidated financial results.
6. Segment Information. The Company is organized into five 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 including e-Business infrastructures that allow companies to
present a personalized, seamless integration of content, commerce and
communities. The Mobile and Embedded Computing Division (MEC) provides solutions
that deliver enterprise information and applications to any locations where
business transactions occur, whether it be a self-service kiosk, a remote branch
office, or in the field using a hand-held device for remote access. 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 industry specific database
management systems, warehouse design tools and central meta data management
facilities that enable customers to develop business intelligence solutions that
integrate and transform data from multiple data sources. Financial Fusion, Inc.
(FFI), formerly HFN and now a wholly-owned subsidiary of the Company, delivers
turnkey Internet banking solutions to financial institutions.
(See Note 2 - Business Combinations).
9
<PAGE> 10
SYBASE INC.
-----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company reports its ESD, MEC, IAD and BID divisions and FFI as reportable
segments in accordance with Statement 131. The Company had four reportable
segments in 1999: ESD, MEC, IAD and BID.
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 March 31, 2000 is presented below:
<TABLE>
<CAPTION>
Consolidated
(In thousands) ESD IAD MEC BID FFI Elimination Total
-------- -------- -------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License fees $ 84,380 $ 14,619 $ 10,701 $ 62 $ 906 -- $110,668
Services 113,598 109 139 56 2,197 -- 116,099
-------- -------- -------- -------- -------- -------- --------
Direct revenues from external
customers 197,978 14,728 10,840 118 3,103 -- 226,767
Intersegment revenues 106 10,194 8,054 2,217 1,460 (22,031) --
-------- -------- -------- -------- -------- -------- --------
Total revenues 198,084 24,922 18,894 2,335 4,563 (22,031) 226,767
Total allocated costs and
expenses before amortization of
goodwill and other purchased
intangibles, write off of
in-process research and
development and amortization of
purchased technology 173,163 18,900 14,175 8,822 9,873 (22,031) 202,902
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) before
amortization of goodwill and
other purchased intangibles, write
off of in-process research and
development and amortization of
purchased technology 24,921 6,022 4,719 (6,487) (5,310) -- 23,865
Amortization of goodwill and
other purchased intangibles 2,017 990 22 449 3,830 -- 7,308
Write off of in-process research
and development -- -- -- -- 8,000 -- 8,000
Amortization of purchased technology 393 -- -- -- 583 -- 976
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) before
unallocated costs 22,511 5,032 4,697 (6,936) (17,723) -- 7,581
Unallocated expense 213
--------
Operating income 7,368
Interest income, interest
expense and other, net 4,580
--------
Income before income taxes $ 11,948
</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
three months ended March 31, 1999 is presented below:
<TABLE>
<CAPTION>
Consolidated
(In thousands) ESD IAD MEC BID Elimination Total
-------- -------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees $ 74,222 $ 15,360 $ 8,562 $ 126 -- $ 98,270
Services 109,819 -- -- 179 -- 109,998
-------- -------- -------- -------- -------- --------
Direct revenues from external customers 184,041 15,360 8,562 305 -- 208,268
Intersegment revenues 300 8,196 7,154 2,877 (18,527) --
-------- -------- -------- -------- -------- --------
Total revenues 184,341 23,556 15,716 3,182 (18,527) 208,268
Total allocated costs and expenses
before amortization of goodwill and
other purchased intangibles, write off
of in-process research and development
and amortization of purchased technology 166,068 18,828 12,559 7,920 (18,527) 186,848
-------- -------- -------- -------- -------- --------
Operating income (loss) before
amortization of goodwill and other
purchased intangibles, write off of
in-process research and development and
amortization of purchased technology 18,273 4,728 3,157 (4,738) -- 21,420
Amortization of goodwill and other
purchased intangibles 2,213 912 12 276 -- 3,413
Amortization of purchased technology 393 -- -- -- -- 393
-------- -------- -------- -------- -------- --------
Operating income (loss) before
unallocated costs 15,667 3,816 3,145 (5,014) -- 17,614
Other unallocated expense 11,198
--------
Operating income costs 6,416
Interest income, interest expense and
other, net 3,040
--------
Income before income taxes $ 9,456
</TABLE>
7. Litigation. Following the Company's announcements on January 2, 1998 and
January 21, 1998 regarding its preliminary results of operations for the quarter
and year ended December 31, 1997, several class action lawsuits were filed
against the Company and certain of its officers and directors in the United
States District Court, Northern District of California (Northern California
District Court). The complaints were similar and alleged violations of federal
and state securities laws and requested unspecified monetary damages. A
consolidated, amended class action complaint was served in June 1998 and named
Sybase KK, the Company's Japanese subsidiary, and Yoshi Ogawa, the Company's
former Japan country manager, as additional defendants.
On January 27, 1998, a purported shareholder derivative action was filed in the
Superior Court of the State of California, County of Alameda (Alameda County
Superior Court). The complaint alleged breach of fiduciary duties by certain
present and former officers and/or directors in connection with the underlying
circumstances alleged in the securities class action complaints described above.
Two similar derivative actions were also filed in Alameda County Superior Court,
and the three derivative actions were consolidated. On April 15, 1998, a
derivative complaint was filed in the Northern California District Court. A
second similar derivative
11
<PAGE> 12
SYBASE INC.
-----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
complaint was also filed in the same court. These cases were dismissed by the
Plaintiffs. In addition, a similar complaint was filed in the Chancery Court in
Delaware. The parties agreed to stay the Delaware case in light of the
California action.
On April 18, 2000, the Company announced that it had agreed to settle the
consolidated federal securities class action and the consolidated California
shareholder derivative actions. The terms of these settlements are subject to
court approval. The Company believes the settlements will have no financial
impact on Sybase going forward.
Following the Company's announcement on April 3, 1995 of its preliminary results
of operations for the 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. The complaints are similar and alleged
violations of federal and state securities laws and requested unspecified
monetary damages. A consolidated amended class action complaint was served in
August 1995. On March 25, 1996, the Court denied Sybase's motion to dismiss the
amended complaint in its entirety and granted the defendants' motion to dismiss
certain individual defendants. The Company filed a motion for summary judgment.
Prior to the judge ruling on the summary judgment, the parties agreed in April
1999 to settle the case for $14.8 million, with Sybase responsible for $1.5
million of such amount plus its accumulated legal expenses. The Company's
insurers are responsible for the balance. Sybase and the insurers paid the
settlement amount into an escrow account maintained by Sybase's outside
attorneys pending approval of the settlement by the Court. After settlement was
reached, the court ruled in favor of Sybase on the summary judgment motion and
dismissed the case. The plaintiffs appealed, and the Ninth Circuit Court of
Appeals vacated the judgment which dismissed the case, remanding the matter to
the trial court for a hearing on the settlement agreement. The settlement amount
of $1.5 million, and the related legal expenses were accrued by the Company
during 1998. The settlement amount was still held in escrow as of March 31,
2000.
The Company is also a party to various legal disputes and proceedings arising
from the ordinary course of business. In the opinion of management, resolution
of those matters is not expected to have a material adverse effect on the
consolidated financial position of the Company. However, depending on the amount
and timing of such resolution, an unfavorable resolution of some or all of these
matters could materially affect the Company's future results of operations or
cash flows in a particular period. The Company believes it has adequately
accrued for these matters at March 31, 2000.
8. On February 2, 2000, the Board of Directors authorized the Company to
repurchase up to $50.0 million of its outstanding common stock in open market
transactions from time to time, subject to price and market conditions. This
action increased the aggregate total authorized under the repurchase program to
$150.0 million.
On January 28, 2000, the Company entered into a 15-year non-cancelable lease of
a new facility to be built in Dublin, California. The lessor has committed to
securing funding to acquire the land and to build two buildings with a total of
approximately 420,000 rentable square feet. The
12
<PAGE> 13
SYBASE INC.
-----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
lease agreement provides for five major milestones that if not met within agreed
upon dates, allow for termination of the lease agreement. Payments under this
lease will commence after the successful completion of building A of the
project, no earlier than May 1, 2001. The Company has the option to renew the
lease for up to two five-year extensions, subject to certain conditions.
The base rent shall be increased by four percent each year, commencing on the
month following the anniversary of the first completion date and thereafter on
each anniversary date of the adjustment date. The lease generally requires
Sybase to pay operating costs, including property taxes, insurance and
maintenance in addition to ordinary operating expenses (such as utilities). The
Company has not entered into an agreement to purchase the facilities at the end
of the initial lease or at the end of either five-year lease extension.
Future minimum payments under the lease agreement are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ending December 31
---------------------------
<S> <C>
2001 $ 5,200
2002 10,608
2003 11,302
2004 11,474
2005 11,933
Thereafter 157,728
--------
Total minimum lease payments $208,245
========
</TABLE>
9. Restructuring. In February 1998, the Company announced and began to implement
a restructuring plan (the 1998 Plan) aimed at improving productivity per
employee, including reductions in sales and marketing, and product development
and engineering expenses. The Company's goal was to significantly reduce its
annual operating expenses by realigning the Company's resources around its core
product initiatives. The 1998 Plan included estimated restructuring charges of
$70.0 million to be incurred in 1998. The 1998 Plan included the termination of
at least 1,000 employees, the termination of certain product lines, and the
consolidation or closure of certain facilities and subsidiaries. As a result of
the 1998 Plan, the Company terminated approximately 1,100 employees,
consolidated or closed more than 45 facilities worldwide, abandoned certain
property, equipment and improvements (principally leasehold improvements and
computer hardware and software) wrote off costs of terminating certain product
lines, and closed down subsidiaries in Mexico, Thailand, Chile, Peru and
Venezuela. The Company has substantially completed all actions associated with
its restructuring and believes that it has achieved the desired results.
13
<PAGE> 14
SYBASE INC.
-----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the activity related to the restructuring reserve
at March 31, 2000:
<TABLE>
<CAPTION>
Accrued Accrued
Liabilities Liabilities
at Amounts at
(In thousands) 12/31/99 paid 3/31/00
----------- ------- -----------
<S> <C> <C> <C>
Termination payments to employees and other
related costs $ 442 $ 235 $ 207
Lease cancellations and commitments 1,296 253 1,043
Other 372 -- 372
------ ------ ------
Total $2,110 $ 488 $1,622
====== ====== ======
</TABLE>
The remaining restructuring reserve primarily relates to certain lease payments
contractually required of the Company on certain closed facilities, net of
associated sublease amounts, and certain remaining termination benefits payable
to employees terminated as part of the 1998 Plan. The leases expire at various
dates through 2003 and substantially all the remaining termination benefits are
anticipated to be paid during 2000.
14
<PAGE> 15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
REVENUES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended Percent
3/31/00 3/31/99 Change
------- ------- --------
<S> <C> <C> <C>
License fees $110.7 $ 98.3 13%
Percentage of total revenues 49% 47%
Services $116.1 $110.0 6%
Percentage of total revenues 51% 53%
Total revenues $226.8 $208.3 9%
</TABLE>
Total revenues for the three months ended March 31, 2000 increased 9 percent to
$226.8 million as compared to $208.3 million for the three months ended March
31, 1999.
License fees revenues increased 13 percent to $110.7 million for the three
months ended March 31, 2000 as compared to $98.3 million for the three months
ended March 31, 1999. The increase in license fees revenues during the quarter
is primarily due to an increase in ESD revenues (primarily enterprise database
products), an increase in MEC (primarily mobile database products) revenues, and
the FFI revenues primarily associated with the Company's acquisition of HFN (See
Note 2 to Condensed Consolidated Financial Statements, Part I, Item 1). The
increases in license revenue generated by the ESD and MEC divisions were
partially offset by a decrease in the license revenues of the BID division
(primarily data warehouse products). Whether the increase 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 6 percent to $116.1 million for the three months
ended March 31, 2000 as compared to $110.0 million for the three months ended
March 31, 1999. 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. The
increase in services revenue is primarily due to an increase in product support
and maintenance fees.
Services revenues as a percentage of total revenues decreased to 51 percent for
the three months ended March 31, 2000 as compared to 53 percent for the three
months ended March 31, 1999.
15
<PAGE> 16
GEOGRAPHICAL REVENUES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended Percent
3/31/00 3/31/99 Change
------- ------- --------
<S> <C> <C> <C>
North American $134.8 $126.9 6%
Percentage of total revenues 59% 61%
International
European $ 64.3 $ 56.9 13%
Percentage of total revenues 28% 27%
Intercontinental $ 27.7 $ 24.5 13%
Percentage of total revenues 12% 12%
Total International $ 92.0 $ 81.4 13%
Percentage of total revenues 41% 39%
Total revenues $226.8 $208.3 9%
</TABLE>
North American revenues (United States and Canada) increased 6 percent to $134.8
million for the three months ended March 31, 2000, as compared to $126.9 million
for the three months ended March 31, 1999. International revenues increased 13
percent for the three months ended March 31, 2000, to $92.0 million from $81.4
million for the three months ended March 31, 1999. European revenues increased
13 percent for the three months ended March 31, 2000 to $64.3 million as
compared to $56.9 million for the three months ended March 31, 1999.
Intercontinental revenues (Japan, Asia Pacific and South America) increased 13
percent for the three months ended March 31, 2000 to $27.7 million as compared
to $24.5 million for the three months ended March 31, 1999. The increase in
North America revenues was primarily attributable to an increase in revenues of
the ESD division. The increase in European revenues was primarily related to an
increase in revenues of the IAD and MEC divisions. The increase in
Intercontinental revenues was primarily attributable to an increase in revenues
of the ESD division. International revenues comprised 41 percent of total
revenues for the three months ended March 31, 2000, up from 39 percent for the
same period for 1999.
In Europe and the Intercontinental region, most revenues and expenses are
denominated in local currencies. The effect of foreign currency exchange rate
changes on revenues was not material for the three months ended March 31, 2000
and 1999. Although the Company takes into account changes in exchange rates over
time in its pricing strategy, the Company's business and results of operations
could be materially and adversely affected by fluctuations in foreign currency
exchange rates. Changes in foreign currency exchange rates, the strength of
local economies, and the general volatility of worldwide software markets may
result in a higher or lower proportion of international revenues as a percentage
of total revenues in the future. For additional risks associated with currency
fluctuations, see "Future Operating Results" and "Quantitative and Qualitative
Disclosures of Market Risk," Part II, Item 3.
16
<PAGE> 17
COSTS AND EXPENSES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended Percent
3/31/00 3/31/99 Change
------- ------- --------
<S> <C> <C> <C>
Cost of license fees $ 10.8 $ 12.3 (12%)
Percentage of license fees revenues 10% 13%
Cost of services $ 60.8 $ 54.0 12%
Percentage of services revenues 52% 49%
Sales and marketing $ 83.3 $ 77.9 7%
Percentage of total revenues 37% 37%
Product development and engineering $ 31.7 $ 37.2 (15%)
Percentage of total revenues 14% 18%
General and administrative $ 17.5 $ 17.1 3%
Percentage of total revenues 8% 8%
Amortization of goodwill and
other purchased intangibles $ 7.3 $ 3.4 114%
Percentage of total revenues 3% 2%
In-process research and development $ 8.0 -- *
Percentage of total revenues 4% --
</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
$10.8 million for the three months ended March 31, 2000, down from $12.3 million
for the three months ended March 31, 1999. Such costs were 10 percent of license
fees revenue for the three months ended March 31, 2000 as compared to 13 percent
for the three months ended March 31, 1999. The decrease in the cost of license
fees was primarily due to a decrease in royalties payable to third parties,
which was partially offset by an increase in amortization relating to
capitalized software and technology acquired in the HFN transaction.
Amortization of capitalized software costs included in cost of license fees was
$5.6 million for the three months ended March 31, 2000 as compared to $4.7
million for the three months ended March 31, 1999. The increase in amortization
of purchased software and capitalized software costs was primarily related to
Powerbuilder 7.0, DWN products and Jaguar 3.0 and 3.5.
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 $60.8 million for the three months
ended March 31, 2000 as compared to $54.0 million for the three months ended
March 31, 1999. These costs were 52 percent and 49 percent of services revenues
for the three months ended March 31, 2000 and 1999, respectively. The increase
in cost of services in absolute dollars and as a percentage of services revenues
is primarily due to an increase in the number of consulting personnel located in
North America
17
<PAGE> 18
(partially attributable to the HFN transaction), and market driven increases in
the labor costs associated with consulting personnel. (See Note 2 to Condensed
Consolidated Financial Statements, Part I, Item 1).
Sales and Marketing. Sales and marketing expenses increased 7 percent to $83.3
million for the three months ended March 31, 2000 as compared to $77.9 million
for the three months ended March 31, 1999. These costs remained consistent at 37
percent as a percentage of total revenues for the three months ended March 31,
2000 and 1999. The increase in sales and marketing expenses in absolute dollars
is primarily due to sales expenses associated with the increased license fee
revenues and costs, and certain marketing programs undertaken during the quarter
ended March 31, 2000. The increase in sales and marketing expense was partially
offset by a decrease in allocated common costs pertaining to legal fees and
litigation costs in connection with defending its lawsuits (See Note 7 to
Condensed Consolidated Financial Statements, Part I, Item 1). 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) decreased 15 percent to
$31.7 million for the three months ended March 31, 2000 as compared to $37.2
million for the three months ended March 31, 1999. These costs as a percentage
of total revenues were 14 percent and 18 percent for the three months ended
March 31, 2000 and 1999, respectively. The decrease in product development and
engineering in absolute dollars and as a percentage of total revenues is due
primarily to a decrease in allocated common costs.
The Company capitalized approximately $3.7 million of software development costs
for the three months ended March 31, 2000 as compared to $4.1 million for the
three months ended March 31, 1999. For the three months ended March 31, 2000,
capitalized software costs included costs incurred for the development of the
Enterprise PortalTM, Adaptive ServerR Enterprise 12.5, Adaptive Server IQ
12.4.2, DirectConnectTM 12.0 and MainframeConnectTM 12.0.
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 $17.5
million for the three months ended March 31, 2000 as compared to $17.1 million
for the same period in 1999. General and administrative expenses represented 8
percent of total revenues for both the three months ended March 31, 2000 and
1999. The slight increase in general and administrative expenses in absolute
dollars is primarily due to the costs associated with growth of the Company
infrastructure during the quarter associated with revenue growth.
Amortization of Goodwill and Other Purchased Intangibles. Amortization of
goodwill and other purchased intangibles were $7.3 million for the three months
ended March 31, 2000 as compared to $3.4 million for the three months ended
March 31, 1999. These costs increased as a percentage of total revenues to 3
percent for the three months ended March 31, 2000 compared to 2 percent for the
same period in 1999. This increase is primarily due to $3.8 million of
amortization of goodwill and established customer list associated with the HFN
acquisition (See Note 2 to Condensed Consolidated Financial Statements, Part I,
Item 1).
18
<PAGE> 19
In-process Research and Development. The following paragraphs contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements regarding our
expectations, including percentage of completion, expected product release
dates, dates for which we expect to begin generating benefits from projects,
expected product capabilities and product life cycles, costs and efforts to
complete projects, growth rates, projected revenue and expense information used
by us to calculate discounted cash flows and discount rates. These
forward-looking statements involve risks and uncertainties, and the cautionary
statements including those set forth below and in "Future Operating Results"
identify important factors that could cause actual results to differ materially
from those predicted in any such forward-looking statement. Such factors
included but are not limited to, delays in the development of in-process
technologies or the release of products into the market, the complexity of the
technology, our ability to successfully manage product introductions, lack of
customer acceptance, competition and changes in technological trends, and market
or general economic considerations. In addition, there can be no assurance that
any of the new products discussed below will be completed, that such products
will achieve either technological or commercial success or that we will receive
any economic benefit from such products as a result of delays in the development
of the technology, the complexity of the technology, changes in customer needs,
or for other reasons, including those described above.
In connection with the acquisition of HFN in the quarter ended March 31, 2000,
the Company allocated $8.0 million of the total purchase price of approximately
$167.4 million to purchased in-process research and development. As part of the
process of analyzing this acquisition, the decision was made to buy technology
that had not yet been commercialized rather than develop the technology
internally. This decision was based on factors such as the amount of time and
costs it would take to bring the technology to market.
HFN is a software company involved in the development of technologies that
enable financial institutions to deliver their services to customers via the
Internet. At the acquisition date, HFN was conducting development and
qualification activities related to a suite of products encompassing bill
presentment, small business functions, alternative service delivery methods and
related underlying software technology. At the date of the acquisition, the
in-process research and development projects had not yet reached technological
feasibility and had no alternative future uses. Accordingly, the value allocated
to these projects was immediately expensed at acquisition.
The Company estimated the fair value of in-process research and development
using an income approach. This involved estimating the fair value of the
in-process research and development by determining the present value of the
estimated after-tax cash flows expected to be generated by the purchased
in-process research and development, by applying risk adjusted discount rates.
The selection of the discount rate was based on a weighted average cost of
capital, adjusted to reflect risks associated with the useful life of each
technology, profitability levels of each technology, the uncertainty of
technology advances known at the time, and each technologies' degree of
completion. Projected future net cash flows attributable to HFN's in-process
research and development, assuming successful development, were discounted to
net present value using a discount rate of 20%. The Company believes that the
estimated in-process research and development amount so determined represents
fair value and does not exceed the amount another third party would pay for the
projects.
19
<PAGE> 20
Revenue estimates were based on relevant market size and growth factors,
expected industry trends, individual product sales cycles and the estimated life
of each product's underlying technology. The analysis of the in-process
technology was determined by incorporating revenue related to the expected
evolution of the technology over time. Once developed, the estimated lifecycle
of the product suite was estimated to be approximately 5 to 7 years. As a whole,
HFN was expected to exhibit compound annual growth of approximately 38% in the
period from 2000 through 2007. It was projected that the suite of products
resulting from the in-process research and development efforts would begin
generating revenue in 2000 and positive cash flow in 2001. Operating expenses
included selling, general and administrative expenses, and research and
development expenses. Total research and development was divided into: (i) the
costs to complete the in-process research and development projects and (ii)
costs for developed products that had already been introduced to the market,
including product maintenance. Costs to complete in-process projects were
estimated by management. These costs were allocated based on an analysis of
expected project completion dates.
The resultant target margin that HFN expected to achieve from the in-process
products was approximately 37%. Profitability was expected to be significantly
lower in the first several years of the product suite's lifecycle compared to
the latter years due to a higher level of sales and marketing expenses as a
percentage of revenue in the earlier years. The financial forecasts only
included results that were projected to be generated by HFN on a standalone
basis. Synergies resulting from the combination of Sybase were not incorporated
into the analysis.
To properly analyze the research and development efforts that had been
accomplished to date and exclude the effort to be completed on the development
efforts underway, it was necessary to adjust the overall forecasts associated
with the research and development projects to reflect only the accomplishments
made as of the date of the acquisition towards the ultimate completion of the
in-process R&D projects. The relative contribution made on the research and
development efforts was assessed based on a variety of factors including
absolute development time (costs) incurred to date, management estimates, and a
detailed analysis of each of the primary tasks completed compared to the tasks
required to complete the efforts and the associated risks. Overall, HFN's
in-process research and development projects were estimated to be approximately
75% complete. HFN estimated that the projects would be completed in March 2000,
after which time it expected to begin generating economic benefits from the
completed projects. As of the valuation date, approximately 86 man months
totaling $650,000 had been expended on the in-process research and development
projects. In total, costs to complete HFN's in-process research and development
were expected to be approximately $150,000 and require 23 man months of work.
Completion of these projects was expected to require significant efforts
involving continued software development as well as the testing and
re-qualification efforts required to turn a new-to-the world software suite into
a set of bug-free, commercial-ready products. These remaining tasks involved
substantial risk due to the complex nature of the activities involved.
Historically, many of HFN's in-process research and development projects have
required rework and additional expenditures in comparable stages of development.
Research and development efforts expected to be completed in March 2000 are
substantially complete and actual results to date have been consistent, in all
material respects, with our assumptions at the time of the acquisitions.
20
<PAGE> 21
OPERATING INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended Percent
3/31/00 3/30/99 Change
------- ------- --------
<S> <C> <C> <C>
Operating income $ 7.4 $ 6.4 15%
Percentage of total revenues 3% 3%
</TABLE>
Operating income was $7.4 million for the three months ended March 31, 2000
compared to operating income of $6.4 million for the three months ended March
31, 1999. The increase in operating income is due primarily to the $18.5 million
increase in total revenues which was partially offset by a $17.5 million
increase in operating expenses including $12.4 million associated with the
amortization of goodwill and established customer lists, write-off of in-process
research and development and the amortization of purchased technology relating
to the acquisition of HFN.
OTHER INCOME (EXPENSE), NET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended Percent
3/31/00 3/31/99 Change
------- ------- --------
<S> <C> <C> <C>
Interest income $ 4.0 $ 3.3 20%
Percentage of total revenues 2% 2%
Interest expense and other, net $ 0.6 $ (0.2) *
Percentage of total revenues * *
</TABLE>
- ---------------
* Not meaningful
Interest income increased 20 percent to $4.0 million for the three months ended
March 31, 2000 compared to $3.3 million for the three months ended March 31,
1999. Interest income consists primarily of interest earned on investments. The
increase in interest income is primarily due to the increase in the
average-invested cash balances in the first quarter of 2000.
Interest expense and other, net was $0.6 million for the three months ended
March 31, 2000 compared to $(0.2) million for the three months ended March 31,
1999. Interest expense and other, net consists primarily of interest expense on
capital lease obligations, 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.
PROVISION FOR INCOME TAXES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended Percent
3/31/00 3/31/99 Change
------- ------- --------
<S> <C> <C> <C>
Provision for income taxes $ 5.3 $ 3.6 47%
</TABLE>
21
<PAGE> 22
The Company recorded income tax provisions of $5.3 million for the three months
ended March 31, 2000, as compared to $3.6 million for the three months ended
March 31, 1999, an increase of 47 percent. 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 March 31, 2000. The
deferred tax assets were net of a valuation allowance of $20.6 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 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 PER SHARE
(DOLLARS AND SHARES IN MILLIONS)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended Percent
3/31/00 3/31/99 Change
------- ------- --------
<S> <C> <C> <C>
Net income $ 6.7 $ 5.9 14%
Percentage of total revenues 3% 3%
Basic net income per share $ 0.08 $ 0.07 14%
Diluted net income per share $ 0.07 $ 0.07 0%
Shares used in computing basic net income per share 86.6 81.8 6%
Shares used in computing diluted net income per share 91.6 82.9 10%
</TABLE>
The Company reported net income of $6.7 million for the three months ended March
31, 2000 as compared to net income of $5.9 million for the three months ended
March 31, 1999. The increase in net income is related to an increase in total
revenues and interest income and expense and other, net which was partially
offset by an increase in operating expenses. Basic net income per share was
$0.08 for the three months ended March 31, 2000 as compared to $0.07 for the
same period in 1999. Diluted net income per share remained consistent at $0.07
for both the three months ended March 31, 2000 and 1999. Shares used in
computing basic net income per share increased 6 percent for the three months
ended March 31, 2000 as compared to the three months ended March 31, 1999 due
primarily to the shares issued for the acquisition of HFN, (See Note 2 to
Condensed Consolidated Financial Statements, Part I, Item 1), the exercise of
employee stock options and the increase of shares outstanding under the employee
stock purchase plan. Shares used in computing diluted net income per share
increased 10 percent for the three months ended March 31, 2000 as compared to
the three months ended March 31, 1999 due primarily to the reasons stated above,
and an increase in outstanding stock options.
22
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended Percent
3/31/00 3/31/99 Change
------- ------- --------
<S> <C> <C> <C>
Working capital $ 126.3 $ 65.5 93%
Cash, cash equivalents and cash investments $ 362.9 $ 297.1 22%
Net cash provided by operating activities $ 52.7 $ 58.6 (10%)
Net cash used for investing activities $ 16.6 $ 51.7 (68%)
Net cash provided by financing activities $ (9.6) $ 7.5 *
</TABLE>
- ---------------
* Not meaningful
Net cash provided by operating activities was $52.7 million for the three months
ended March 31, 2000 compared to $58.6 million for the three months ended March
31, 1999. Net cash provided by operating activities reflects a decrease in
accounts receivable of $0.8 million for the three months ended March 31, 2000 as
compared to a decrease of $44.3 million for the three months ended March 31,
1999. Net cash provided by operating activities also reflects an increase in
deferred revenue $28.6 million for the three months ended March 31, 2000
compared to a decrease of $.2 million for the three months ended March 31, 1999.
Depreciation and amortization charges, which are included in the net income, but
do not require the use of cash, amounted to $25.1 million for the three months
ended March 31, 2000 compared to $23.9 million for the three months ended March
31, 1999. This increase in depreciation and amortization was primarily due to
the amortization of goodwill and other purchased intangibles, excluding the
write off of in-process research and development for HFN which resulted in a
non-cash charge of $8.0 million in the quarter, associated with the HFN
transaction. (See Note 2 to Condensed Consolidated Financial Statements, Part
I, Item 1).
Net cash used for investing activities was $16.6 million for the three months
ended March 31, 2000 compared to net cash used for investing activities of $51.7
million for the three months ended March 31, 1999. Investing activities
included: capital expenditures of $7.9 million for the three months ended March
31, 2000 compared to $4.6 million in the same period for 1999; $26.9 million for
business combinations, net of cash acquired, for the three months ended March
31, 2000 compared to $8.0 million for the three months ended March 31, 1999; and
capitalized software development costs amounting to $3.7 million for the three
months ended March 31, 2000 compared $4.1 million in the comparable period of
1999. Net cash provided from net maturities of investments was $12.9 million for
the three months ended March 31, 2000 compared to net purchases of cash
investments of $37.5 million for the same period of 1999.
Net cash used for financing activities for the three months ended March 31, 2000
was $9.6 million compared to net cash provided by financing activities of $7.5
million in the same period for 1999. Cash of $25.2 million was used by the
Company during the three months ended March 31, 2000 to repurchase its common
stock. During this same period, no cash proceeds were generated from the
issuance of common stock. In the three months ended March 31,
23
<PAGE> 24
1999, cash proceeds of $4.5 million were generated from the issuance of Common
Stock. Cash of $15.6 million was generated from the issuance of treasury stock
associated with the Company's stock option and employee stock purchase plans in
the three months ended March 31, 2000 compared to $4.2 million generated in the
comparable period of 1999.
The Company engages in business operations around the world and is therefore
exposed to foreign currency fluctuations. As of March 31, 2000, the Company had
identifiable assets totaling $166.7 million associated with its European
operations and $72.8 million associated with its Intercontinental operations.
The Company experiences foreign exchange transaction exposure from certain
balances denominated in different currencies. The Company hedges certain of
these short-term exposures under a plan approved by the Board of Directors (see
"Qualitative and Quantitative Disclosure of Market Risk," Part II, Item 3). 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 $362.9 million at March 31,
2000, compared to $297.1 million at March 31, 1999.
During the three months ended March 31, 2000, the Company repurchased 1.1
million shares of its common stock for $25.2 million pursuant to the Board of
Directors' authorization. On February 2, 2000, the Board of Directors authorized
the Company to repurchase up to an additional $50.0 million of its outstanding
common stock in open market transactions from time to time, subject to price and
market conditions. This action increased the $100.0 million previously
authorized under this program.
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
Sybase's future operating results may vary substantially from period to period
due to a variety of significant risks, some of which are discussed in this
Report on Form 10-Q. We strongly urge current and prospective investors to
carefully consider the cautionary statements and risks contained in this Report
and in the Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
Stock Price Volatility
Sybase's ability to exceed, or its failure to achieve, expected operating
results for any period could significantly impact the Company's stock price.
Inevitably, some investors will experience gains while others will experience
losses depending on the timing of their investment. The market for the Company's
stock is highly volatile, and the trading price of the Company's Common Stock
has fluctuated widely during the past 5 years. The stock price may continue to
fluctuate in the future in response to various factors, including the Company's
financial results, press and industry analyst reports, market acceptance of our
products and pricing policies, activities of competitors, and other events. In
addition, the stock market has from time to time
24
<PAGE> 25
experienced extreme price and volume fluctuations that have categorically
affected the market price for high-technology companies, but which often have
been unrelated to the operating performance of these companies.
Revenue-Related Factors
The timing and amount of Sybase's revenues are subject to a number of factors
that make it difficult to accurately estimate revenues and operating results on
a quarterly or annual basis. In the Company's experience, license fees revenues
tend to decline between the fourth quarter of one year and the first quarter of
the next year. This has contributed to lower total revenues and earnings in the
first quarter compared to the prior fourth quarter. For example, total revenues
for the quarter ended March 31, 2000 were $226.8 million compared to total
revenues of $237.1 million for the quarter ended December 31, 1999. We currently
anticipate that this seasonal pattern will continue.
Since the Company operates with little or no backlog, quarterly revenues depend
largely on orders booked and shipped in that quarter. Historically, the Company
has recorded 50% to 70% of its quarterly revenues in the last month of each
quarter, particularly during the final two weeks of that month. The Company's
customers include many large enterprises that make substantial investments in
our products and services. Therefore, the inability to record one or more large
orders from a customer at the very end of a quarter could materially and
adversely impact our results or operations. The Company's operating expenses are
based on projected annual and quarterly revenue levels, and are generally
incurred ratably throughout each quarter. Since our operating expenses are
relatively fixed in the short term, failure to realize projected revenues for a
specified period could impact operating results, causing an operating loss for
that period, as occurred in the first quarter of 1998.
In North America, Sybase currently ships most of its products from its
California and Massachusetts distribution facilities. Because we tend to record
a high percentage of revenues during the last two weeks of each quarter,
disruption of operations at either facility at that time (due to natural
calamity or systems failure, for example) could directly harm the Company's
ability to record revenues for such quarter. This could, in turn, have an
adverse impact on operating results.
Competition
The market for the Company's products and services is fast-paced and extremely
competitive, and is marked by dynamic customer demands, short product life
cycles, and the rapid emergence of the Internet marketplace. Sybase has numerous
competitors, including large companies such as Oracle Corporation, Microsoft
Corporation, and IBM Corporation, and smaller highly aggressive Internet firms.
Many of these companies may have greater financial, technical, sales, and
marketing resources, and a larger installed base than Sybase. In addition, our
competitors' advertising and marketing efforts could adversely influence
customer perception of our products and services, and harm our business and
prospects as a result. To remain competitive, Sybase must be able to develop new
products, enhance existing products and retain competitive pricing policies in a
timely manner. The Company's failure to compete successfully with new or
existing competitors could have a material adverse impact on the Company's
business, and on the market price of the Company's Common Stock.
25
<PAGE> 26
Product Development
Increasing widespread use of the Internet may significantly alter how the
Company does business in the future. This, in turn, could affect our ability to
timely meet the demand for new or enhanced products and services at competitive
prices.
During 1998 and 1999, Sybase created certain integrated product sets intended to
offer customers more complete packaged solutions. As a result, certain
individual products incorporated into the product sets were no longer available
for sale separately. Such integration is intended to address customer needs in a
more comprehensive way and improve Company revenues and profitability. However,
the elimination of certain products for individual sale could adversely affect
license fees and service revenues if this change is not well received in the
marketplace.
Sybase's future results may also be affected if its products cannot interoperate
and perform well with software products of other companies. Certain leading
applications currently are not interoperable with Sybase products, and others
may never be. In addition, many of Sybase's principal products are designed for
use with products offered by competitors. In the future, vendors of non-Sybase
products may become less willing to provide the Company with access to their
products, technical information, and marketing and sales support, which could
harm the Company's business and prospects.
Divisional Sales Model
In January 1999, the Company realigned its direct sales force, product teams and
professional services capabilities into four divisions. This reorganization was
intended to enhance overall Company revenues and profitability by providing
increased focus on each of four key markets: Enterprise Solutions, Mobile and
Embedded Computing, Internet Applications and Business Intelligence. In January
2000, Financial Fusion, Inc. (formerly HFN), a wholly-owned subsidiary,
increased the Company's focus on the financial services market. If the Company
has misjudged the demand for its products and services in these markets, or if
the divisions are unable to coordinate their respective sales efforts in a
focused and efficient way, the change could materially and adversely affect
Sybase's business and prospects.
International Operations
Sybase derives a substantial portion of its revenues from its international
operations. For the period ended March 31, 2000, these revenues represented 41%
of the Company's total revenues for that period. In 1999, these revenues
represented 39% of the Company's total revenues. As a global concern, the
Company faces exposure to adverse movements in foreign currency exchange rates.
For a discussion of risks associated with currency fluctuation, see "Financial
Risk Management - Foreign Exchange Risk" above, incorporated here by reference.
The Company's revenues from international operations could also fluctuate due to
the relative immaturity of some markets, rapid growth in other markets, and
organizational changes made by Sybase to accommodate these conditions. During
1998 and 1999, for example, the Company closed subsidiaries in Mexico, Thailand,
Chile, Peru and Venezuela. Several significant management and organizational
changes occurred in the same period, including the resignation or replacement of
several country managers in Europe and Asia and the European General Manager.
26
<PAGE> 27
Other factors that could affect aspects of our international operations include:
- - Changes in political, regulatory, or economic conditions
- - Changes or limitations in trade protection laws
- - Changes in tax treaties or laws favorable to Sybase
- - Natural disasters
Intellectual Property
The Company's inability to obtain adequate copyright, patent or trade secret
protection for our products in certain countries may have a material adverse
impact on future operating results. Also, as the number of software products and
associated patents increase, it is possible that software developers will become
subject to more frequent infringement claims.
In the past, third parties have claimed that their patents or other proprietary
rights were violated by Sybase products. It is possible that such claims will be
asserted in the future. Regardless of whether these claims have merit, they can
be time consuming and expensive to defend or settle, and can harm the Company's
business and reputation. We do not believe our products infringe any third party
patents or proprietary rights, but there is no guarantee that we can avoid
claims or findings of infringement in the future.
Human Resources
The Company's inability to hire and retain qualified technical, managerial,
sales and other employees could affect our product development and sales
efforts, other aspects of Company operations, and our financial results.
Competition for such personnel is intense, particularly with the increase in
pre-IPO Internet "dot-com" companies that attract many skilled and knowledgeable
individuals. The Company's financial and stock price performance relative to the
"dot-com" companies and other companies with whom Sybase competes for employees
could also impact the degree of future employee turnover.
During 1998 and 1999, the Company experienced a number of changes in its
executive management team. For example, John Chen became the Company's Chairman
of the Board, President and Chief Executive Officer in 1998. In early 1999,
Pieter Van der Vorst became the Company's Chief Financial Officer, Pamela George
was named Vice President, Corporate Marketing, and Daniel Carl became Vice
President and General Counsel. Additionally, when the Company established its
operating divisions in 1999, it appointed a general manager for each division.
This resulted in changing or reassigning the prior job responsibilities of a
number of executives. Further changes involving executives and managers could
increase the current rate of employee turnover, particularly in consulting,
engineering and sales.
27
<PAGE> 28
Acquisitions
Sybase frequently explores possible acquisitions and strategic ventures with
third parties as a way of expanding and enhancing its business. Sybase has
acquired a number of companies during the past several years, and will likely
acquire other companies, products, or technologies in the future. On January 20,
2000, the Company acquired Home Financial Network, an Internet financial
services company specializing in the development of customized e-Finance Web
sites. In 1999, Sybase acquired Data Warehouse Network, a provider of
industry-specific business intelligence applications. During 1998, the Company
acquired Intellidex, a provider of data management technology for deploying and
managing data warehouse environments. For a further discussion of the Company's
recent acquisitions, see Note 2 to Condensed Consolidated Financial Statements,
Part I, Item 1 incorporated here by reference.
The Company may not achieve the desired benefits of its acquisitions,
particularly if it is unable to successfully assimilate an acquired company's
management team, business infrastructure, company culture, or other important
factors. Additionally, dedication of additional Company resources to handle
these integration tasks could temporarily divert attention from other important
Company business. Such acquisitions could also result in costs, liabilities, or
additional expenses that could harm the Company's results of operations and
financial condition.
Recent Accounting Pronouncements
For a discussion of risks associated with recent accounting pronouncements, see
Note 5 to Condensed Consolidated Financial Statements, Part I, Item 1.
Year 2000 Update
Since January 1, 2000, Sybase's worldwide operations have not experienced any
significant problems or issues associated with the "Year 2000" issue.
Additionally, our customer support organizations have not reported any
significant Year 2000 problems experienced by customers as a result of using our
products. The "Year 2000" issue arose from uncertainty regarding how many
computer systems would be affected by the rollover at the end of 1999 of the
two-digit year value from 99 to 00. Systems that could not properly recognize
such information were in danger of generating incorrect data or suffering system
failure.
Well before the end of 1999, Sybase assessed 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 the remedial work necessary to make these systems Year 2000 compliant.
The costs associated with these actions did not have a significant effect on the
Company's results of operations or financial condition. The Company does not
believe it will experience any significant Year 2000-related issues, but it will
continue to monitor its operations throughout the remainder of the year. The
Company believes it is adequately prepared to resolve any Year 2000 issues that
may arise, and that the cost of doing so will not have a material effect on the
Company's results of operations or financial condition. There is no guarantee
that Sybase will not encounter Year 2000-related issues in the future.
28
<PAGE> 29
Euro Currency
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversation rates between their existing currencies and the
Euro. The participating countries adopted the Euro as their common legal
currency on that date. The transition period will last through January 1, 2001.
There was no significant impact on the Company's worldwide operations caused by
the adoption of the Euro. The introduction and the use of the Euro has not
materially affected, and is not expected to affect in the future, the Company's
foreign exchange activities, its use of derivatives and other financial
instruments, or result in any material cost to the Company. The Company will
continue to assess the impact of the introduction of the Euro currency over the
transition period as well as the period subsequent to the transition.
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 "Future Operating Results," Part II,
Item 2.
Foreign Exchange Risk
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). There has been no material change in the
Company's foreign exchange risk exposure since December 31, 1999.
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates to
the Company's investment portfolio, which consists of taxable, short-term money
market instruments and debt securities with maturities between 90 days and two
years. The Company does no use derivative financial instruments in its
investment portfolio. The Company places its investments with high credit
quality issuers and, by policy, limits the amount of credit exposure to any one
issuer.
The Company mitigates default risk by investing in only the safest and highest
credit quality securities and by monitoring the credit rating of investment
issuers. The portfolio includes only
29
<PAGE> 30
marketable securities with active secondary or resale markets to ensure
portfolio liquidity. 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 March 31, 2000
were not material.
The Company has no cash flow exposure due to rate changes for cash equivalent
and cash investments as all of these investments are at fixed interest rates.
There has been no material change in the Company's interest rate risk exposure
since December 31, 1999.
30
<PAGE> 31
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The information required by this item is incorporated by reference to Note 7 to
Condensed Consolidated Financial Statements, Part I, Item 1.
31
<PAGE> 32
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K:
Filed on February 3, 2000; Report on Form 8-KA filed on April 3,
2000.
32
<PAGE> 33
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.
May 15, 2000 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)
33
<PAGE> 34
EXHIBIT INDEX TO SYBASE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SYBASE INC. AS OF MARCH 31, 2000 AND FOR
THE YEARS THEN ENDED.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 272,991
<SECURITIES> 52,029
<RECEIVABLES> 209,550
<ALLOWANCES> (25,240)
<INVENTORY> 0
<CURRENT-ASSETS> 544,702
<PP&E> 359,853
<DEPRECIATION> (293,295)
<TOTAL-ASSETS> 894,136
<CURRENT-LIABILITIES> 420,076
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 571,968
<TOTAL-LIABILITY-AND-EQUITY> 894,136
<SALES> 110,668
<TOTAL-REVENUES> 226,767
<CGS> 10,827
<TOTAL-COSTS> 60,785
<OTHER-EXPENSES> 31,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 11,948
<INCOME-TAX> 5,257
<INCOME-CONTINUING> 6,691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,691
<EPS-BASIC> 0.08<F1>
<EPS-DILUTED> 0.07
<FN>
<F1>REFLECTS BASIC EPS ACCORDING TO SFAS 128, EARNINGS PER SHARE
</FN>
</TABLE>
