<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 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
Incorporation or Organization) Identification No.)
6475 Christie Avenue, Emeryville, CA 94608
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (510) 922-3500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On October 31, 2000, 87,679,036 shares of the Registrant's Common Stock, $.001
par value, were outstanding.
<PAGE> 2
SYBASE, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Forward-Looking Statements 3
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 (Unaudited) 4
and December 31, 1999
Condensed Consolidated Statements of Operations for the three months and 5
nine months ended September 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the nine months 6
ended September 30, 2000 and 1999 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2: Management's Discussion and Analysis of Financial Condition 20
and Results of Operations (Unaudited)
Item 3: Quantitative and Qualitative Disclosures of Market Risk 35
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 37
Signatures 38
Exhibit Index 39
</TABLE>
2
<PAGE> 3
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that involve risk and
uncertainties that could cause the actual results of Sybase, Inc. and its
consolidated subsidiaries (Sybase, or the Company) to differ materially from
those expressed or implied by such forward-looking statements. These risks
include sales productivity, particularly in North America; possible disruptive
effects of organizational changes; shifts in market demand for the Company's
products and services; public perception of the Company, its technology vision
and future prospects; rapid technological changes; competitive factors; delays
in scheduled product availability dates (which could result from various
occurrences including development or testing difficulties, software errors,
shortages in appropriately skilled software engineers and project management
problems); interoperability of the Company's products with other software
products; and, other risks detailed from time to time in the Company's
Securities and Exchange Commission filings.
Expectations, forecasts, and projections that may be contained in this report
are by nature forward-looking statements, and future results cannot be
guaranteed. The words "anticipate," "believe," "estimate," "expect," "intend,"
"will," and similar expressions, as they relate to Sybase and its management,
may identify forward-looking statements. Such statements reflect the current
views of Sybase with respect to future events and are subject to certain risks,
uncertainties and assumptions. Forward-looking statements that were true at the
time made may ultimately prove to be incorrect or false, or may vary materially
from those described as anticipated, believed, estimated, intended or expected.
The Company does not intend to update such forward-looking statements.
3
<PAGE> 4
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Dollars in thousands, except share and per share data) (Unaudited) 1999
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 230,765 $ 250,103
Short-term cash investments 36,711 59,094
--------- ---------
Total cash, cash equivalents and short-term cash investments 267,476 309,197
Accounts receivable, net 198,194 182,708
Deferred income taxes 16,015 15,826
Other current assets 19,478 14,924
--------- ---------
Total current assets 501,163 522,655
Long-term cash investments 76,901 43,702
Property, equipment and improvements, net 57,313 67,587
Deferred income taxes 25,220 25,238
Capitalized software, net 32,977 35,934
Goodwill and other purchased intangibles, net 159,785 24,528
Other assets 16,167 17,691
--------- ---------
Total assets $ 869,526 $ 737,335
========= =========
Current liabilities:
Accounts payable $ 20,689 $ 8,349
Accrued compensation and related expenses 47,404 57,625
Accrued income taxes 43,187 40,253
Other accrued liabilities 98,605 101,876
Deferred revenue 188,048 187,323
--------- ---------
Total current liabilities 397,933 395,426
Other liabilities 5,843 5,799
Minority interest 1,937 --
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; 90,520,935 shares issued and 88,552,770
outstanding (1999-82,952,192 shares issued and 80,920,691
outstanding) 91 83
Additional paid-in capital 576,190 432,352
Accumulated deficit (41,701) (48,037)
Accumulated other comprehensive loss (28,807) (16,426)
Cost of 1,968,165 shares of treasury stock (1999-2,031,501 shares) (41,960) (31,862)
--------- ---------
Total stockholders' equity 463,813 336,110
--------- ---------
Total liabilities and stockholders' equity $ 869,526 $ 737,335
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
(In thousands, except per share data) 2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $114,370 $104,216 $335,911 $ 298,189
Services 124,733 111,887 364,012 336,369
-------- -------- -------- ---------
Total revenues 239,103 216,103 699,923 634,558
Costs and expenses:
Cost of license fees 11,411 9,204 32,934 29,992
Cost of services 60,940 55,880 183,054 162,032
Sales and marketing 84,591 75,736 251,774 230,786
Product development and engineering 35,770 34,823 98,930 107,387
General and administrative 14,828 16,630 50,110 51,417
Amortization of goodwill and other 8,107 3,399 24,578 10,519
purchased intangibles
In-process research and development -- -- 8,000 --
Cost (reversals) of restructuring -- -- -- (5,619)
-------- -------- -------- ---------
Total costs and expenses 215,647 195,672 649,380 586,514
-------- -------- -------- ---------
Operating income 23,456 20,431 50,543 48,044
Interest income 4,765 3,477 13,095 9,878
Interest expense and other, net 1,242 1,251 1,720 1,473
Minority interest 24 -- 24 --
-------- -------- -------- ---------
Income before income taxes 29,487 25,159 65,382 59,395
Provision for income taxes 12,974 9,103 28,768 23,164
-------- -------- -------- ---------
Net income $ 16,513 $ 16,056 $ 36,614 $ 36,231
======== ======== ======== =========
Basic net income per share $ 0.19 $ 0.20 $ 0.42 $ 0.44
======== ======== ======== =========
Shares used in computing basic net income per share 88,279 81,611 87,636 81,861
======== ======== ======== =========
Diluted net income per share $ 0.18 $ 0.19 $ 0.40 $ 0.43
======== ======== ======== =========
Shares used in computing diluted net income per share 93,029 84,088 92,311 83,717
======== ======== ======== =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
SYBASE, INC.
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------
(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 36,614 36,231
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 81,082 68,906
Write-off of in-process research and development 8,000 --
Write-off of assets in restructuring -- (545)
(Gain) Loss on disposal of assets (50) 3,178
Deferred income taxes (171) (96)
Changes in assets and liabilities:
Accounts receivable (18,448) 33,963
Other current assets (4,554) (4,573)
Accounts payable 9,185 (2,269)
Accrued compensation and related expenses (11,616) (887)
Accrued income taxes 2,927 11,223
Other accrued liabilities (3,494) (13,967)
Deferred revenues 12 (20,052)
Other liabilities 14 1,233
--------- ---------
Net cash provided by operating activities 99,501 112,345
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale cash investments (95,854) (114,651)
Maturities of available-for-sale cash investments 57,858 30,345
Sales of available-for-sale cash investments 26,346 7,530
Business combinations, net of cash acquired (30,098) (8,047)
Purchases of property, equipment and improvements (15,754) (21,083)
Proceeds from sale of fixed assets 100 11,036
Capitalized software development costs (14,085) (14,178)
Minority Interest 1,937 --
Decrease in other assets (590) 156
--------- ---------
Net cash used for investing activities (70,140) (108,892)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in other current liabilities -- (1,432)
Proceeds from issuance of common stock 2,876 4,704
Proceeds from the issuance of treasury stock 25,775 20,607
Purchases of treasury stock (66,151) (31,533)
--------- ---------
Net cash used for financing activities (37,500) (7,654)
Effect of exchange rate changes on cash (11,199) (3,120)
--------- ---------
Net decrease in cash and cash equivalents (19,338) (7,321)
Cash and cash equivalents, end of period 230,765 217,344
Cash investments, end of period 113,612 101,724
--------- ---------
Total cash, cash equivalents, and cash investments, end of period $ 344,377 $ 319,068
========= =========
Supplemental disclosures:
Interest paid $ 354 $ 76
========= =========
Income taxes paid $ 22,175 $ 11,441
========= =========
</TABLE>
See accompanying notes.
6
<PAGE> 7
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 and nine months ended September
30, 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. In September 2000, the Company acquired certain assets
of its distributor in Mexico for approximately $4.0 million, and assumed certain
of its liabilities. In addition, pursuant to the relevant agreements, the
Company is obligated to make certain contingent payments in subsequent years
based on certain agreed-upon performance criteria. The aggregate maximum
additional contingent amount payable in 2001 and 2002 is $5.2 million. This
transaction has been accounted for as a purchase. The results of operations of
the Mexico entity 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.
On January 20, 2000, the Company acquired Home Financial Network, Inc. (HFN), an
Internet financial services company specializing in the development of
customized e-finance websites. This transaction is accounted for as a purchase.
The total purchase cost was approximately $167.4 million, consisting of the
following:
<TABLE>
<CAPTION>
(In millions, except share amounts)
<S> <C>
Issuance of 7,817,471 Sybase shares $129.8
Cash 25.9
HFN stock options assumed 11.2
Merger costs, legal and accounting 0.5
------
Total purchase consideration $167.4
======
</TABLE>
The estimated fair value of the common stock to be issued was based on the
average closing price of 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,
was based on the Black-Scholes valuation model using the following assumptions:
7
<PAGE> 8
SYBASE INC.
_____________________________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- 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 and development was charged to expense as a non-recurring
charge in the first fiscal 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 fiscal results of operations of Sybase and HFN as if the acquisition
had occurred as of the beginning of 1999 and 2000, and 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
of 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>
Nine Nine
Months Months
Ended Ended
(In thousands except for per share data) 9/30/00 9/30/99
--------- --------
<S> <C> <C>
Revenue $ 699,923 $636,583
Net income 32,354 14,041
Basic net income per share 0.37 0.16
Diluted net income per share 0.35 0.15
</TABLE>
In March 1999, the Company paid $5.4 million for Convertible Secured Promissory
Notes due December 31, 2002 (Notes) 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. On July 13, 2000, Sybase converted the Notes, then sold
10.0 percent of the resulting share capital to a third party for $1.7 million.
In February 1999, the Company acquired Data Warehouse Network (DWN), an
Ireland-based, privately held provider of packaged, industry-specific business
intelligence applications. Under the acquisition agreement, the Company paid
$2.7 million in cash for certain assets and
8
<PAGE> 9
SYBASE INC.
_____________________________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 of which $1.8 million has been
paid to date. 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 July 2000, the Company invested $2.0 million for a majority interest in a
company established with a subsidiary of Hong Kong Telecom. The company
is engaged in the business of operating as an application services
provider to deliver a total financial portal solution for different finance
verticals. The accounts of the company are included in the Condensed
Consolidated Financial Statements.
In July 2000, the Company invested $10.0 million for a minority interest in
Cygnifi Derivatives Services, LLC, a limited liability company established with
JP Morgan Ventures Corporation and several others. The purpose of this entity is
to develop, market and supply business-to-business e-commerce risk management
services and solutions to finance institutions, asset managers, fund managers,
pension funds, foundations, endowed institutions, corporations and other users
of such services. The Company accounts for its investment in this entity under
the cost method of accounting.
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 and warrants using the treasury
stock method. The following table shows the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
(In thousands, except per share data) 9/30/00 9/30/99 9/30/00 9/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $16,513 $16,056 $36,614 $36,231
Shares used in computing basic net
income per share 88,279 81,611 87,636 81,861
Effect of dilutive securities - stock options 4,750 2,477 4,675 1,856
------- ------- ------- -------
Shares used in computing diluted
net income per share 93,029 84,088 92,311 83,717
Basic net income per share $ 0.19 $ 0.20 $ 0.42 $ 0.44
======= ======= ======= =======
Diluted net income per share $ 0.18 $ 0.19 $ 0.40 $ 0.43
======= ======= ======= =======
</TABLE>
9
<PAGE> 10
SYBASE INC.
_____________________________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Comprehensive Income. The following table sets forth the calculation of
comprehensive income for all periods presented:
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
(In thousands) 9/30/00 9/30/99 9/30/00 9/30/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $16,513 $ 16,056 $36,614 $36,231
Foreign currency translation
gains/(losses) (7,879) 956 (12,381) (4,380)
------- -------- ------- -------
Comprehensive income $ 8,634 $ 17,012 $24,233 $31,851
======= ======== ======= =======
</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 disclosure requirements described in
SAB 101, and any changes resulting from SAB 101 must be reported as a change in
accounting principles in the quarter ending December 31, 2000. The adoption of
SAB 101 is not expected to have a material effect on the Company's financial
statements.
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. In June 2000, the FASB issued Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment to FASB Statement No. 133" which amended Statement 133 with respect
to four specific issues. The Company is required to adopt Statement 133, as
amended, for the year ending December 31, 2001. The Company does not expect that
the adoption of Statement 133 will have a material effect 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.
10
<PAGE> 11
SYBASE INC.
_____________________________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
segments, 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
support e-portals and integrate external data, events and applications into the
portals. The Mobile and Embedded Computing Division (MEC) provides solutions
that deliver enterprise information and applications to any location where
business transactions occur, including remote, mobile and hand-held platforms.
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 translate data from multiple 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).
The Company reports its ESD, MEC, IAD and BID divisions and FFI as reportable
segments in accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information." 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 based 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
11
<PAGE> 12
SYBASE INC.
_____________________________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
other, net and the provision for income taxes are not broken out by segment. The
Company does not account for, or report to the CODM, its assets or capital
expenditures by segment.
A summary of the segment financial information reported to the CODM for the
three months ended September 30, 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 $ 82,962 $13,296 $15,365 $ 281 $ 2,466 -- $114,370
Services 118,980 154 372 395 4,832 124,733
-------- ------- ------- ------- -------- -------- --------
Direct revenues from external customers 201,942 13,450 15,737 676 7,298 239,103
Intersegment revenues 676 7,354 9,579 5,475 1,209 (24,293) --
-------- ------- ------- ------- -------- -------- --------
Total revenues 202,618 20,804 25,316 6,151 8,507 (24,293) 239,103
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 172,863 16,155 17,968 8,225 13,155 (24,293) 204,073
-------- ------- ------- ------- -------- -------- --------
Operating income (loss) before amortization of
goodwill and other purchased intangibles, write
off of in-process research and development and
amortization of purchased technology 29,755 4,649 7,348 (2,074) (4,648) -- 35,030
Amortization of goodwill and other purchased
intangibles 1,520 983 21 1,173 4,410 -- 8,107
Amortization of purchased technology 393 -- -- -- 750 -- 1,143
-------- ------- ------- ------- -------- -------- -------
Operating income (loss) before unallocated costs 27,842 3,666 7,327 (3,247) (9,808) -- 25,780
Unallocated expense 2,324
-------
Operating income 23,456
Interest income, interest expense and other, net 6,007
Minority interest 24
-------
Income before income taxes $29,487
=======
</TABLE>
12
<PAGE> 13
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 September 30, 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 $ 75,463 $16,811 $ 8,194 $ 3,748 -- $104,216
Services 111,744 -- 67 76 -- 111,887
-------- ------- ------- ------- ------- --------
Direct revenues from external customers 187,207 16,811 8,261 3,824 -- 216,103
Intersegment revenues 213 7,286 11,201 3,362 (22,062) --
-------- ------- ------- ------- ------- --------
Total revenues 187,420 24,097 19,462 7,186 (22,062) 216,103
Total allocated costs and expenses before amortization
of goodwill and other purchased intangibles, write off
of in-process research and development and amortization
of purchased technology 167,853 19,377 13,699 7,924 (22,062) 186,791
-------- ------- ------- ------- ------- --------
Operating income (loss) before amortization of goodwill
and other purchased intangibles, write off of in-process
research and development and amortization of purchased
technology 19,567 4,720 5,763 (738) -- 29,312
Amortization of goodwill and other purchased intangibles 2,148 991 12 240 -- 3,391
Amortization of purchased technology 393 -- -- -- -- 393
-------- ------- ------- ------- ------- --------
Operating income (loss) before unallocated costs 17,026 3,729 5,751 (978) -- 25,528
Unallocated expense 5,097
--------
Operating income 20,431
Interest income, interest expense and other, net 4,728
-------
Income before income taxes $25,159
=======
</TABLE>
13
<PAGE> 14
SYBASE INC.
_____________________________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the segment financial information reported to the CODM for the nine
months ended September 30, 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 $247,112 $43,085 $38,351 $ 476 $ 6,887 -- $335,911
Services 352,120 380 858 1,028 9,626 364,012
-------- ------- ------- -------- -------- -------- --------
Direct revenues from external customers 599,232 43,465 39,209 1,504 16,513 699,923
Intersegment revenues 1,479 24,366 27,578 12,483 2,954 (68,860) --
-------- ------- ------- -------- -------- -------- --------
Total revenues 600,711 67,831 66,787 13,987 19,467 (68,860) 699,923
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 518,849 51,683 49,100 24,578 34,334 (68,860) 609,684
-------- ------- ------- -------- -------- -------- --------
Operating income (loss) before amortization
of goodwill and other purchased intangibles,
write off of in-process research and
development and amortization of purchased
technology 81,862 16,148 17,687 (10,591) (14,867) -- 90,239
Amortization of goodwill and other purchased
intangibles 5,404 2,957 64 2,811 13,342 -- 24,578
Write off of in-process research and development -- -- -- -- 8,000 -- 8,000
Amortization of purchased technology 1,179 -- -- -- 2,083 -- 3,262
-------- ------- ------- -------- -------- -------- --------
Operating income (loss) before unallocated costs 75,279 13,191 17,623 (13,402) (38,292) -- 54,399
Unallocated expense 3,856
--------
Operating income 50,543
Interest income, interest expense and other, 14,815
net
Minority interest 24
--------
Income before income taxes $ 65,382
========
</TABLE>
14
<PAGE> 15
SYBASE INC.
_____________________________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the segment financial information reported to the CODM for the nine
months ended September 30, 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 $214,602 $49,274 $26,603 $ 7,710 -- $298,189
Services 335,841 -- 67 461 -- 336,369
-------- ------- ------- -------- ------- --------
Direct revenues from external customers 550,443 49,274 26,670 8,171 -- 634,558
Intersegment revenues 990 22,976 26,730 8,712 (59,408) --
-------- ------- ------- -------- ------- --------
Total revenues 551,433 72,250 53,400 16,883 (59,408) 634,558
Total allocated costs and expenses before amortization
of goodwill and other purchased intangibles, write off
of in-process research and development and amortization
of purchased technology 490,102 58,796 39,563 23,444 (59,408) 552,497
-------- ------- ------- -------- ------- --------
Operating income (loss) before amortization of goodwill
and other purchased intangibles, write off of in-process
research and development and amortization of purchased
technology 61,331 13,454 13,837 (6,561) -- 82,061
Amortization of goodwill and other purchased intangibles 7,040 2,755 36 680 -- 10,511
Amortization of purchased technology 1,179 -- -- -- -- 1,179
-------- ------- ------- -------- ------- --------
Operating income (loss) before unallocated costs 53,112 10,699 13,801 (7,241) -- 70,371
Unallocated expense 22,327
--------
Operating income 48,044
Interest income, interest expense and other, net 11,351
--------
Income before income taxes $ 59,395
========
</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 K.K., 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
15
<PAGE> 16
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 the federal securities class
actions settlement were approved by the court on September 29, 2000. The terms
of the settlement of the shareholder derivative actions were approved by the
court on July 7, 2000. The Company believes the settlements will have no future
financial impact on Sybase.
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 that dismissed the case, remanding the matter to
the trial court for a hearing on the settlement agreement. The trial court
approved the settlement on June 13, 2000. The settlement amount of $1.5 million,
and the related legal expenses were accrued by the Company during 1998. These
escrowed amounts have been paid.
The Company is also a party to various legal disputes and proceedings arising in
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 September 30, 2000.
8. Future Commitments. 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 previously authorized
under the repurchase program to $150.0 million. (See Note 11 - Subsequent
Events).
16
<PAGE> 17
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 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 that allows for purchase of 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 (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>
During the third quarter of 1999, the Company sold its facility in Concord,
Massachusetts and simultaneously entered into a sales-leaseback agreement. Under
the terms of this agreement, the Company entered into a seven-year operating
lease. The sales price of $5.3 million resulted in a book gain of $2.8 million,
which will be amortized over the seven-year lease period.
Future minimum lease payments under this noncancellable operating lease as of
September 30, 2000 are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 134
2001 535
2002 545
2003 564
2004 564
Thereafter 940
------
Total minimum lease payments $3,282
======
</TABLE>
17
<PAGE> 18
SYBASE INC.
_____________________________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 then-existing 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.
The following table summarizes the activity related to the restructuring reserve
at September 30, 2000:
<TABLE>
<CAPTION>
Accrued Accrued
Liabilities Liabilities
at Amounts at
(In thousands) 12/31/99 Paid 9/30/00
----------- ------- -----------
<S> <C> <C> <C>
Termination payments to employees and other
related costs $ 442 $235 $ 207
Lease cancellations and commitments 1,296 644 652
Other 372 -- 372
------ ---- ------
Total $2,110 $879 $1,231
====== ==== ======
</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.
10. Costs (Reversals) of Restructuring. The Company has assessed the status of
the restructure accrual at the end of each quarter since the restructure actions
were last taken in December 1998. During the quarter ended June 30, 1999, the
Company reversed by credit to operating expenses $5.6 million of restructuring
costs related to the 1998 Plan. The reversals included $1.8 million related to
termination payments to employees and other related costs; $3.1 million related
to lease cancellations and commitments; and $0.7 million of legal and other
fees. The significant components of the reversal to the accrual for termination
payments to employees and other related costs included: (i) termination payments
due to employees who were terminated as part of the 1998 Plan, which were either
not claimed, or were not utilized because the
18
<PAGE> 19
SYBASE INC.
_____________________________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
terminated employee did not qualify to receive the benefits; and (ii)
termination payments due to employees whose positions were eliminated as part of
the 1998 Plan, but who were asked to stay with the Company to fill other
positions. The significant components of the reversal relating to the accrual
for lease cancellations and commitments included accruals associated with 20
locations where the Company was able to (i) sublet certain closed facilities
earlier than anticipated, or (ii) negotiate settlements with the landlords for
the termination of the leases on certain closed facilities for an amount less
than the amounts provided in the 1998 Plan. During the nine months ended
September 30, 2000, no new information has arisen which warranted a reversal of
the accrual.
11. Subsequent Events. On November 1, 2000, the Board of Directors authorized
the repurchase of up to an additional $100.0 million of the Company's
outstanding common stock in open market transactions from time to time, subject
to price and market conditions. This action increases the aggregate total
previously authorized under the repurchase program to $250.0 million.
19
<PAGE> 20
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
REVENUES
(DOLLARS IN MILLIONS)
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/00 9/30/99 Change 9/30/00 9/30/99 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
License fees $114.4 $104.2 10% $335.9 $298.2 13%
Percentage of total revenues 48% 48% 48% 47%
Services $124.7 $111.9 11% $364.0 $336.4 8%
Percentage of total revenues 52% 52% 52% 53%
Total revenues $239.1 $216.1 11% $699.9 $634.6 10%
</TABLE>
Total revenues for the three months ended September 30, 2000, increased 11
percent to $239.1 million as compared to $216.1 million for the three months
ended September 30, 1999. For the nine months ended September 30, 2000, total
revenues increased 10 percent to $699.9 million as compared to $634.6 million
for the nine months ended September 30, 1999.
License fees revenues increased 10 percent to $114.4 million for the three
months ended September 30, 2000, as compared to $104.2 million for the three
months ended September 30, 1999. For the nine months ended September 30, 2000,
license fees revenues increased 13 percent to $335.9 million as compared to
$298.2 million for the nine months ended September 30, 1999. The increase in
license fees revenues during the quarter and year to date is primarily due to an
increase in ESD revenues (primarily enterprise database products), an increase
in MEC revenues (primarily mobile database products), and the FFI revenues
subsequent to the Company's acquisition of HFN (See Note 2 to the Condensed
Consolidated Financial Statements). The increases in license fees revenues
generated by the ESD and MEC divisions were partially offset by a decrease in
the license revenues of BID (primarily data warehouse products) and IAD
(primarily PowerBuilder(R) 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 11 percent to $124.7 million for the three months
ended September 30, 2000, as compared to $111.9 million for the three months
ended September 30, 1999. For the nine months ended September 30, 2000, services
revenues increased 8 percent to $364.0 million as compared to $336.4 million in
the nine months ended September 30, 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 revenues during the
quarter and year to date is primarily due to an increase in product support and
maintenance fees as well as an increase in consulting revenue primarily related
to FFI.
20
<PAGE> 21
Services revenues as a percentage of total revenues remained consistent at 52
percent for the three months ended September 30, 2000, and September 30, 1999,
respectively. For the nine months ended September 30, 2000, services revenues as
a percentage of total revenues was 52 percent as compared to 53 percent for the
nine months ended September 30, 1999.
<TABLE>
<CAPTION>
GEOGRAPHICAL REVENUES
(DOLLARS IN MILLIONS)
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/00 9/30/99 Change 9/30/00 9/30/99 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
North American $148.3 $136.7 9% $429.3 $389.5 10%
Percentage of total revenues 62% 63% 61% 61%
International
European $ 57.1 $ 52.0 10% $178.8 $165.9 8%
Percentage of total revenues 24% 24% 26% 26%
Intercontinental $ 33.7 $ 27.4 23% $ 91.8 $ 79.2 16%
Percentage of total revenues 14% 13% 13% 13%
Total International $ 90.8 $ 79.4 14% $270.6 $245.1 10%
Percentage of total revenues 38% 37% 39% 39%
Total revenues $239.1 $216.1 11% $699.9 $634.6 10%
</TABLE>
North American revenues (United States and Canada) increased 9 percent to $148.3
million for the three months ended September 30, 2000, as compared to $136.7
million for the three months ended September 30, 1999. North American revenues
increased 10 percent to $429.3 million in the nine months ended September 30,
2000, as compared to $389.5 million for the nine months ended September 30,
1999. International revenues increased 14 percent and 10 percent for the three
and nine months ended September 30, 2000, respectively, to $90.8 million and
$270.6 million, from $79.4 million and $245.1 million, respectively, for both
comparable periods of 1999. European revenues increased 10 percent and 8 percent
for the three and nine months ended September 30, 2000, respectively, to $57.1
million and $178.8 million, from $52.0 million and $165.9 million, respectively,
for both comparable periods of 1999. Intercontinental revenues (Japan, Asia
Pacific and South America) increased 23 percent and 16 percent for the three and
nine months ended September 30, 2000, respectively, to $33.7 million and $91.8
million, from $27.4 million and $79.2 million, respectively, for both comparable
periods of 1999. The increase in North America revenues for the three and nine
months ended September 30, 2000, was primarily attributable to an increase in
revenues of the ESD, FFI, and MEC divisions. The increase in European revenues
for the three month period ended September 30, 2000, was primarily related to an
increase in revenues of the ESD division, partially offset by decreased revenues
in the IAD division. The increase in European revenues for the nine month period
ended September 30, 2000, primarily related to an increase in revenues of the
ESD division. The increase in Intercontinental revenues for the three and nine
months ended September 30, 2000, was primarily related to an increase in
revenues of the ESD and MEC divisions.
21
<PAGE> 22
International revenues comprised 38 percent and 39 percent of total revenues for
the three and nine months ended September 30, 2000, respectively, compared to 37
percent and 39 percent for the three and nine months ended September 30, 1999,
respectively.
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 and nine months ended
September 30, 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," Item 3.
COSTS AND EXPENSES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Percent Months Ended Months Ended Percent
9/30/00 9/30/99 Change 9/30/00 9/30/99 Change
------------ ------------ ------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Cost of license fees $ 11.4 $ 9.2 24% $ 32.9 $ 30.0 10%
Percentage of license fees revenues 10% 9% 10% 10%
Cost of services $ 60.9 $ 55.9 9% $183.1 $162.0 13%
Percentage of services revenues 49% 50% 50% 48%
Sales and marketing $ 84.6 $ 75.7 12% $251.8 $230.8 9%
Percentage of total revenues 35% 35% 36% 36%
Product development and engineering $ 35.8 $ 34.8 3% $ 98.9 $107.4 (8%)
Percentage of total revenues 15% 16% 14% 17%
General and administrative $ 14.8 $ 16.6 (11%) $ 50.1 $ 51.4 (3%)
Percentage of total revenues 6% 8% 7% 8%
Amortization of goodwill and other purchased
intangibles $ 8.1 $ 3.4 139% $ 24.6 $ 10.5 134%
Percentage of total revenues 3% 2% 4% 2%
In-process research and development -- -- -- $ 8.0 -- *
Percentage of total revenues -- -- 1% --
Cost (reversal) of restructuring -- -- -- -- $ (5.6) *
Percentage of total revenues -- -- -- (1%)
</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
$11.4 million and $32.9 million for the three and
22
<PAGE> 23
nine months ended September 30, 2000, respectively, as compared to $9.2 million
and $30.0 million for the same periods in 1999. Such costs were 10 percent of
license fees revenues for the three and nine months ended September 30, 2000, as
compared to 9 percent and 10 percent, respectively, for the same periods in
1999. The increase in the cost of license fees in the three and nine months
ended September 30, 2000, as compared to the same periods in 1999 was primarily
due to increases in amortization of capitalized software costs and the
amortization of purchased technology acquired in the HFN transaction. The
increase for the nine months ended September 30, 2000, was partially offset by a
decrease in royalties payable to third parties. Amortization of capitalized
software costs included in cost of license fees was $6.0 million and $17.4
million for the three and nine months ended September 30, 2000, respectively, as
compared to $5.1 million and $14.7 million for the same periods in 1999. The
increase in amortization of capitalized software costs was primarily related to
Adaptive Server(R) Enterprise 12.0, PowerBuilder 7.0, Jaguar CTS(TM) 3.0 and
3.5, and Sybase(R) Enterprise Portal 1.0.
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 $60.9 million and $183.1 million for
the three and nine months ended September 30, 2000, respectively, as compared to
$55.9 million and $162.0 million for the same periods in 1999. These costs were
49 percent and 50 percent of services revenues for the three months and nine
months ended September 30, 2000, as compared to 50 percent and 48 percent for
the same periods in 1999. The increase in cost of services in absolute dollars
for both comparable periods is primarily due to an increase in the number of
consulting personnel located in North America (partially attributable to the
acquisition of HFN), and market driven increases in the labor costs associated
with consulting personnel.
Sales and Marketing. Sales and marketing expenses were $84.6 million and $251.8
million for the three and nine months ended September 30, 2000, respectively, as
compared to $75.7 million and $230.8 million for the same periods in 1999. These
costs were 35 percent of total revenues for the three months ended September 30,
2000 and 1999, and remained consistent at 36 percent of total revenues for the
nine months ended September 30, 2000 and 1999. The increase in sales and
marketing expenses in absolute dollars for both comparable periods is primarily
due to sales expenses associated with increased revenues, including the addition
of FFI, and certain marketing programs. The increase in sales and marketing
expense was partially offset by a decrease in allocated common costs. The
Company allocates various common costs including certain legal expenses,
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 $35.8 million and
$98.9 million for the three and nine months ended September 30, 2000,
respectively, as compared to $34.8 million and $107.4 million for the same
periods in 1999. These costs as a percentage of total revenues were 15 percent
and 14 percent for the three and nine months ended September 30, 2000,
respectively, and 16 percent and 17 percent, respectively, for the same periods
in 1999. The increase in product development and engineering expenses in
absolute dollars for the three months ended September 30, 2000, compared to the
three months ended September 30, 1999, was due to the amortization of third
party technology costs, which was partially offset by the decrease in allocated
common costs. The decrease in product development and engineering costs in
absolute
23
<PAGE> 24
dollars for the nine months ended September 30, 2000, compared to the nine
months ended September 30, 1999 was primarily due to a decrease in allocated
common costs.
The Company capitalized approximately $5.5 million and $14.1 million of software
development costs for the three and nine months ended September 30, 2000,
respectively, as compared to $5.6 million and $14.2 million for the same periods
in 1999. For the nine months ended September 30, 2000, capitalized software
costs included costs incurred for the development of the Sybase Enterprise
Portal, Adaptive Server Enterprise 12.5, Adaptive Server IQ 12.4.2 and 12.5,
DirectConnect(TM) 12.0 and 12.5, Enterprise Application Server, and
MainframeConnect(TM) 12.0 and 12.5.
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 $14.8
million and $50.1 million for the three and nine months ended September 30,
2000, respectively, as compared to $16.6 million and $51.4 million for the same
periods in 1999. General and administrative expenses represented 6 percent and 7
percent of total revenues for the three and nine months ended September 30,
2000, respectively, and 8 percent for the same periods in 1999. The decrease in
general and administrative expenses in absolute dollars for the three and nine
months ended September 30, 2000, was primarily due to a decrease in allocated
common costs which were partially offset by the costs associated with FFI.
Amortization of Goodwill and Other Purchased Intangibles. Amortization of
goodwill and other purchased intangibles were $8.1 million and $24.6 million for
the three and nine months ended September 30, 2000, respectively, as compared to
$3.4 million and $10.5 million for the same periods in 1999. These costs were 3
percent and 4 percent of total revenues for the three and nine months ended
September 30, 2000, respectively, and 2 percent for the same periods in 1999.
The increase in absolute dollars is primarily due to amortization of goodwill
and the established customer list associated with the HFN acquisition (See Note
2 to Condensed Consolidated Financial Statements).
In-process Research and Development. 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 had been 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 that time, 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
the date of acquisition.
24
<PAGE> 25
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, using 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.
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 the 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 percent
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 percent. 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-
25
<PAGE> 26
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.
The research and development efforts described above are substantially complete
and actual results to date have been consistent, in all material respects, with
our assumptions at the time of the acquisitions.
Costs (Reversals) of Restructuring. In February 1998, the Company announced and
began to implement 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. It also contemplated 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
then-existing 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.
The Company has assessed the status of the restructure accrual at the end of
each quarter since the restructure actions were last taken in December 1998.
During the three 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 reversals included $1.8 million related to termination payments to employees
and other related costs; $3.1 million related to lease cancellations and
commitments; and $0.7 million of legal and other fees. The significant
components of the reversal to the accrual for termination payments to employees
and other related costs included: (i) termination payments due to employees who
were terminated as part of the 1998 Plan, which were either not claimed, or were
not utilized because a terminated employee did not stay a specified period to
qualify for the benefits, and (ii) termination payments due to employees whose
positions were eliminated as part of the 1998 Plan but who were asked to stay
with the Company to fill other positions. The significant components of the
reversal relating to the accrual for lease cancellations and commitments
included accruals, associated with 20 locations, where the Company was able to
sublet certain closed facilities earlier than anticipated or was able to
negotiate a settlement with the landlords for the termination of the leases on
certain closed facilities for amounts less than the amount provided in the 1998
Plan. During the nine months ended September 30, 2000, no new information has
arisen which warranted a reversal of the accrual.
26
<PAGE> 27
OPERATING INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/00 9/30/99 Change 9/30/00 9/30/99 Change
------- ------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating income $23.5 $20.4 15% $50.5 $48.0 5%
Percentage of total revenues 10% 9% 7% 8%
Operating income exclusive of
cost (reversals) of restructuring $23.5 $20.4 15% $50.5 $42.4 19%
Percentage of total revenues 10% 9% 7% 7%
</TABLE>
Operating income, was $23.5 million and $50.5 million for the three and nine
months ended September 30, 2000, respectively, compared to operating income
(exclusive of reversals of restructuring charges) of $20.4 million and $42.4
million for the same periods in 1999. The increase in operating income for both
comparable periods is primarily due to an increase in total revenues which was
partially offset by an increase in operating expenses including expenses
associated with the amortization of goodwill and established customer lists, the
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 Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/00 9/30/99 Change 9/30/00 9/30/99 Change
----------- ------------ ------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 4.8 $ 3.5 37% $13.1 $ 9.9 33%
Percentage of total revenues 2% 2% 2% 2%
Interest expense and other, net $ 1.2 $ 1.3 (1%) $ 1.7 $ 1.5 17%
Percentage of total revenues 1% 1% * *
Minority interest $ 0.0 * * $ 0.0 * *
Percentage of total revenues * * * *
</TABLE>
---------------
* Not meaningful
Interest income was $4.8 million and $13.1 million for the three and nine months
ended September 30, 2000, respectively, compared to $3.5 million and $9.9
million for the same periods in 1999. Interest income consists primarily of
interest earned on investments. The increase in interest income for both
comparable periods is primarily due to the increase in the average-invested cash
balances.
Interest expense and other, net was $1.2 million and $1.7 million for the three
and nine months ended September 30, 2000, respectively, compared to $1.3 million
and $1.5 million for the same periods in 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
27
<PAGE> 28
currency transactions and related hedging activities, including the cost of
hedging foreign currency exposures, and gains from the disposition of certain
real estate and investments.
PROVISION FOR INCOME TAXES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/00 9/30/99 Change 9/30/00 9/30/99 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $13.0 $9.1 43% $28.8 $23.2 24%
</TABLE>
The Company recorded income tax provisions of $13.0 million and $28.8 million
for the three and nine months ended September 30, 2000, respectively, as
compared to $9.1 million and $23.2 million for the same periods in 1999. 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 $41.2 million at September 30, 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. 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 EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Percent Ended Ended Percent
9/30/00 9/30/99 Change 9/30/00 9/30/99 Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 16.5 $ 16.1 3% $ 36.6 $ 36.2 1%
Percentage of total revenues 7% 7% 5% 6%
Basic net income per share $ 0.19 $ 0.20 (5%) $ 0.42 $ 0.44 (5%)
Diluted net income per share $ 0.18 $ 0.19 (5%) $ 0.40 $ 0.43 (7%)
Shares used in computing basic
net income per share 88.3 81.6 8% 87.6 81.9 7%
Shares used in computing
diluted net income per share 93.0 84.1 11% 92.3 83.7 10%
</TABLE>
The Company reported net income of $16.5 million and $36.6 million for the three
and nine months ended September 30, 2000, respectively, as compared to net
income of $16.1 million and $36.2 million for the same periods in 1999. The
increase in net income for both comparable periods is related to the increase in
total revenues and interest income which was partially offset by an increase in
2000 operating expenses and provision for income taxes. The increase in
operating expenses is primarily related to the amortization of various
intangibles, and the write-
28
<PAGE> 29
off of in-process research and development acquired in connection with the
acquisition of HFN, and the operating expenses of HFN. Basic net income per
share was $0.19 and $0.42 for the three and nine months ended September 30,
2000, respectively, as compared to $0.20 and $0.44 for the same periods in 1999.
Diluted net income per share was $0.18 and $0.40 for the three and nine months
ended September 30, 2000, respectively, as compared to $0.19 and $0.43 for the
same periods in 1999. Shares used in computing basic net income per share
increased 8 percent and 7 percent for the three and nine months ended September
30, 2000, respectively, as compared to the same periods in 1999 primarily due to
the shares issued in 2000 in connection with the acquisition of HFN (See Note 2
to Condensed Consolidated Financial Statements). Shares used in computing
diluted net income per share increased 11 percent and 10 percent for the three
and nine months ended September 30, 2000, as compared to the same periods in
1999, primarily for the reasons stated above.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended Percent
9/30/00 9/30/99 Change
------- ------- -------
<S> <C> <C> <C>
Working capital $103.2 $112.3 (8%)
Cash, cash equivalents and cash investments $344.4 $319.1 8%
Net cash provided by operating activities $ 99.5 $112.3 (11%)
Net cash used for investing activities $ 70.1 $108.9 (36%)
Net cash used for financing activities $ 37.5 $ 7.7 *
</TABLE>
---------------
* Not meaningful
Net cash provided by operating activities was $99.5 million for the nine months
ended September 30, 2000, compared to $112.3 million for the nine months ended
September 30, 1999. Net cash provided by operating activities reflects an
increase in accounts receivable of $18.4 million for the nine months ended
September 30, 2000, as compared to a decrease of $34.0 million for the nine
months ended September 30, 1999. Net cash provided by operating activities also
reflects no material change in deferred revenue for the nine months ended
September 30, 2000, compared to a decrease of $20.1 million for the same period
in 1999. Depreciation and amortization charges, which are included in net
income, but do not require the use of cash, amounted to $81.1 million for the
nine months ended September 30, 2000 compared to $68.9 million for the same
period in 1999. This increase in depreciation and amortization was primarily due
to the amortization of goodwill and other purchased intangibles in connection
with the HFN acquisition, 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
first quarter of 2000. (See Note 2 to Condensed Consolidated Financial
Statements).
Net cash used for investing activities was $70.1 million for the nine months
ended September 30, 2000, compared to $108.9 million for the same period in
1999. Investing activities included: capital expenditures of $15.8 million for
the nine months ended September 30, 2000, compared
29
<PAGE> 30
to $21.1 million for the same period in 1999; $30.1 million for business
combinations, net of cash acquired, for the nine months ended September 30,
2000, compared to $8.0 million for the same period in 1999; and cash used for
net purchases of cash investments of $11.7 million for the nine months ended
September 30, 2000, compared to $76.8 million for the same period in 1999.
Net cash used for financing activities was $37.5 million for the nine months
ended September 30, 2000, compared to $7.7 million for the same period in 1999.
For the nine months ended September 30, 2000, cash of $66.2 million was used by
the Company to repurchase its common stock, cash of $25.8 million was generated
from the issuance of treasury stock associated with the Company's stock option
and employee stock purchase plans, and cash of $2.9 million was generated from
the issuance of common stock. For the comparable period of 1999, cash of $31.5
million was used by the Company to repurchase its common stock, cash of $20.6
million was generated from the issuance of treasury stock, and cash of $4.7
million was generated from the issuance of common stock.
The Company engages in global business operations and is therefore exposed to
foreign currency fluctuations. As of September 30, 2000, the Company had
identifiable net assets totaling $178.0 million associated with its European
operations and $88.5 million associated with its intercontinental operations.
The Company experiences foreign exchange translation exposure on its net assets
denominated in different currencies. As certain of these 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 "Accumulated other comprehensive loss" under
"Stockholders' equity" on the balance sheet.
The Company also experiences foreign exchange transaction exposure from certain
balances denominated in the non-functional currency of the originating entity.
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," Item 3.
Cash, cash equivalents and cash investments totaled $344.4 million at September
30, 2000, compared to $319.1 million at September 30, 1999.
During the nine months ended September 30, 2000, the Company repurchased 2.9
million shares of its common stock through open market transactions pursuant to
a stock repurchase program authorized by the Board in 1999. On February 2 and
November 1, 2000, the Board authorized increases in the funds available under
the program, bringing the aggregate total amount authorized to $250.0 million.
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
30
<PAGE> 31
contained in this Report, in the Reports on Form 10-Q for the quarters ended
March 30, 2000, and June 30, 2000, respectively, and in the Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, as amended.
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 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. 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.
Sybase currently ships most of its products from three distribution facilities
located in California, the Netherlands, and Singapore. Because we tend to record
a high percentage of revenues during the last two weeks of each quarter,
disruption of operations at any of these facilities 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 a number of smaller highly aggressive
Internet and "dot.com" firms. Many of these companies may have greater
31
<PAGE> 32
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.
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.
In 2000, the Company began shipping Sybase Enterprise Portal, the industry's
first enterprise-class portal product designed to enable organizations to
provide personalized business interfaces to employees, customers, partners and
suppliers. In May 2000, the latest versions of Replication Server(R),
EnterpriseConnect and MainframeConnect, the Company's data movement and data
access products designed to operate with the Enterprise Portal technology, also
became generally available. Sybase Enterprise Portal solutions are intended to
enable successful e-Business strategies for organizations transacting business
via the Internet. As a general matter, deployment of enterprise portals has
increased dramatically in recent years, and the Company believes that increasing
demand for enterprise portal solutions will enhance Sybase's revenues and
profitability. However, if the market does not continue to develop as
anticipated, or if the Company's Enterprise Portal solutions and services do not
successfully compete in the marketplace, increased revenues and profitability
may not be realized.
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, the acquisition of HFN (now Financial Fusion, Inc.), a wholly-owned
subsidiary, increased the Company's focus on the financial services market. In
May 2000, the Company announced the launch of iAnywhere Solutions, Inc., a
wholly-owned subsidiary, dedicated to mobile and wireless e-Business products
and services. If the Company has misjudged the demand for its products and
services in these markets, or if the Company's divisions and subsidiaries
generally are unable to coordinate their respective sales efforts in a
32
<PAGE> 33
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 three months ended September 30, 2000, these revenues
represented 38 percent of the Company's total revenues for that period. In 1999,
these revenues represented 39 percent of the Company's total revenues for the
fiscal year. 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 "Quantitative and Qualitative
Disclosure of Market Risk - Foreign Exchange Risk", Item 3.
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. For
example, in September 2000, the Company acquired certain assets and assumed
certain liabilities of its distributor in Mexico. During 1998 and 1999, the
Company closed then-existing 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.
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
33
<PAGE> 34
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 the past two years, the Company has experienced a number of changes in
its Board of Directors and in its executive management team. For example, in
April 2000, Linda K. Yates became a member of the Sybase Board. In November
1999, Cecilia Claudio also joined the Board. During 1999, Leo T. Hindery,
Jeffrey T. Webber and Robert S. Epstein resigned from the Board. 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. Further changes in Board
members could alter the Company's current strategic business plans.
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 September 2000, the Company acquired certain of the assets of its
distributor in Mexico. In 1999, Sybase acquired Data Warehouse Network, a
provider of industry-specific business intelligence applications. For a further
discussion of the Company's recent acquisitions, see Note 2 to the Condensed
Consolidated Financial Statements, 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
"New Accounting Pronouncements", in Note 5 to the Condensed Consolidated
Financial Statements, Part I, Item 1, incorporated here by reference.
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
34
<PAGE> 35
organizations have not reported any significant Year 2000 problems experienced
by customers as a result of using our products.
The Company does not believe it will experience any significant Year
2000-related issues, but it will continue to monitor its operations in the near
future. 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.
Euro Currency
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion 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," Item 2.
See also "Forward-Looking Statements," page 3, for a general discussion
regarding such statements.
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
resulting from 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.
35
<PAGE> 36
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 not 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 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 September 30, 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.
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<PAGE> 37
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were filed
during the three months ended September 30, 2000.
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<PAGE> 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 14, 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)
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<PAGE> 39
EXHIBIT INDEX TO SYBASE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
39
